c.l* 


UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


A  TREATISE   ON  THE  LAW 


IN   RELATION   TO 


PROMOTERS  AND  THE  PROMOTION 


OF 


CORPORATIONS. 


KF 

A 


" 


TREATISE  ON  THE  LAW 


IN    RELATION    TO 


PROMOTERS  AND  THE  PROMOTION 


OF 


BY 

ARTHUR  M.  ALGER. 
m 


BOSTON: 
LITTLE,  BlfcwN,  AND   COMPANY. 

189T. 


Copyright,  1897, 
BY  ARTHUR  M.  ALGEK. 


SSnibersitg 
JOHN  WILSON  AND  SON,  CAMBRIDGE,  TI.  S.  A. 


PREFACE. 


THE  public  is  constantly  responding  to  the  invitations  of 
promoters  of  corporate  enterprises  to  contribute  the  funds 
necessary  for  their  prosecution.  Very  large  sums  of  money 
in  the  aggregate  are  annually  invested  in  such  ventures  by 
persons  who  must  necessarily  rely  more  or  less  upon  the 
good  faith  and  integrity  of  those  engaged  in  promoting 
them.  The  promoters  "  have  in  their  hands  the  creation 
and  moulding  of  the  corporation ;  they  'have  the  power  to 
define  how  and  when,  and  in  what  shape,  and  under  what 
supervision,  it  shall  start  into  existence  and  begin  to  act 
as  a  corporation."  The  material  facts  in  relation  to  the 
undertaking  are  often  exclusively  within  their  knowledge. 
In  view  of  these  conditions,  it  is  apparent  that  the  question 
of  the  reciprocal  rights  and  obligations  of  the  promoter 
and  the  corporation,  and  of  the  shareholder  and  the  pro- 
moter, is  of  great  practical  importance ;  and  it  would  seem 
to  be  worthy  of  fuller  treatment  than  that  which  has  been 
accorded  to  it  in  the  text-books  on  the  law  of  corporations. 
In  the  absence  of  any  treatise  on  the  subject,  the  writer 

761470 


VI  PEEFACE. 

submits  this  work  to  the  profession,  in  the  hope  that  the 
attempt  to  do  what  so  far  has  been  left,  to  a  great  extent, 
undone,  namely,  to  analyze  the  cases  and  to  state  and 
classify  the  principles  deducible  from  the  cases,  may  prove 

useful. 

A.  M.  A. 

MAY  1,  1897. 


CONTENTS. 


CHAPTER  I. 

NATURE  OP  PROMOTERSHIP  AND   RELATION  OF  PROMOTERS 
TO  THE  CORPORATION 


§  1.    Explanation    of    term    "pro- 
moter." 

2.  Term  not    applicable  to  one 

acting  as  an  agent  only. 

3.  In  re  The  Great  Wheal  Pol- 

gooth  Co.,  53  L.  J.  Ch.  42. 

4.  One  who  is  an  agent  may  be  a 

promoter  also. 

6.  Agent  may  be  promoter,  al- 
though compensation  does 
not  come  from  corporation. 

6.  Central  Land  Co.  v.  Obenchain, 

92  Va.  130. 

7.  Tests    to    ascertain  who    are 

promoters. 

8.  Ex-Mission  Land  &  Water  Co. 

v.  Flash,  97  Cal.  610. 

9.  St.  Louis  &  Fort  Scott  R.  R.  Co. 

v.  Tiernan,  37  Kan.  606. 

10.  Question  of  fact  whether  one 

is  a  promoter. 

11.  Emma   Silver    Mining  Co.  v. 

Lewis,  4  C.  P.  D.  396. 

12.  Bagnall  v.  Carlton,  6  Ch.  D.  37 1 . 

13.  Nant-y-Glo  &  Blaina  Iron  Works 

Co.  v.  Grave,  12  Ch.  D.  738. 


§  14.    Twycross  v.  Grant,  2  C.  P.  D. 
469. 

15.  Lydney  &  Wigpool  Iron  Ore 

Co.  v.  Bird,  33  Ch.  D.  85. 

16.  Mere  intent  or  agreement  to 

promote  does  not  make  one 
a  promoter. 

17.  Absolute    purchase  of  prop- 

erty with  view  to  resale 
to  projected  corporation  as 
evidence  of  promotership. 

18.  Ladywell     Mining     Co.     v. 

Brooks,  35  Ch.  D.  400. 

19.  Conditional  purchase  of  prop- 

erty with  view  to  resale  to 
projected  corporation  as  evi- 
dence of  promotership. 

20.  Promotership  not  limited  to 

period  anterior  to  organiza- 
tion of  corporation. 

21.  Fiduciary    relation    of    pro- 

moters to  corporation. 

22.  Existence  of  such  relation  es- 

ta"blished  by  authorities. 

23.  Consequences  of  fiduciary  re- 

lationship. 


CHAPTER  II. 

DUTIES  OF  PROMOTERS  TO  THE  CORPORATION 


25 


§  24.    Duties  of  promoters  in  organ- 
ization of  corporation. 
25.     Erlanger   v.    New    Sombrero 
Phosphate  Co.,  3  App.  Cas. 
1218. 

.  26.    Judgment  of  Lord  Cairns. 


§  27.    Exception  to  rule  laid  down 

by  Lord  Cairns. 

28.  Promoters  must  disclose  their 
interest  in  transactions  with 
corporation. 


vm 


CONTENTS. 


§  29.  As  vendo*  of  corporation  not 
always  bound  to  disclose 
cost  of  property  to  them. 

30.  Under    some    circumstances 

must  disclose  such  cost. 

31.  Trustees    not    permitted    to 

make  secret  profit  in  matter 
of  trusteeship. 

32.  Similar  rule   applies  to  pro- 

moters. 

33.  Mere   declaration    that    pro- 

moter is  interested  not 
enough  when  made  to  the 
directors  only. 

34.  Imperial    Mercantile    Credit 

Association  v.  Coleman,  L. 
R.  6  H.  L.  189. 

35.  Disclosure    of   interest    only 

sufficient  if  made  to  the 
shareholders. 


§  36.    Full  disclosure  must  be  made. 

37.  In  re  Westmoreland  Green  & 

Blue  Slate  Co.,  2  Ch.  (1893) 
612. 

38.  To  whom  disclosure  must  be 

made  and  by  whom  acted 
upon. 

39.  Effect  of  disclosure  to,  and 

consent  by,  all  the  share- 
holders representing  entire 
capital  stock. 

40.  Effect  of    disclosure   to   and 

consent  by  all  the  existing 
shareholders,  when  entire 
capital  stock  not  issued. 

41.  Ultra  vires  acts  not  validated 

by  disclosure  to  and  con- 
sent by  all  the  shareholders. 


CHAPTER  III. 

PAGE 

ACCOUNTABILITY  OP  PROMOTERS  TO  THE  CORPORATION  FOR 
PROFITS,  GIFTS,  AND  COMMISSIONS 41 

ARTICLE  I.  —  ACCOUNTABILITY  OF   PROMOTERS  FOR  PROFITS   OBTAINED 

BY    THEM    AS    VENDORS    OF    THE    CORPORATION. 


§  42.  Right  of  corporation  to  claim 
benefit  of  purchase  made 
by  promoters  while  such. 

43.  Tyrrell  v.  Bank  of  London, 

10  H.  L.  C.  26. 

44.  Mere  fact  that  property  pur- 

chased by  promoters  while 
such  does  not  entitle  cor- 
poration to  benefit  of  pur- 
chase. 

45.  Benson  v.  Heathorn,  1  Y.  & 

C.  326. 

46.  Right  of  corporation  to  claim 

benefit  of  purchase  made 
by  promoter  before  he  be- 
came such. 


§  47.  In  re  Ambrose  Lake  Tin  and 
Copper  Mining  Co.,  14  Ch. 
D.  390. 

48.  Ladywell     Mining     Co.      v. 

Brooks,  35  Ch.  D.  400. 

49.  Colorable  transfer  of  property 

to  promoter  to  be  by  him 
sold  to  the  corporation. 

50.  Whaley  Bridge  Calico  Print- 

ing Co.  v.  Green,  5  Q.  B.  D. 
109. 

51.  Acts  and  declarations  of  pro- 

moter giving  corporation 
right  to  claim  benefit  of 
purchase  made  by  him. 


CONTENTS. 


IX 


§  52.     Simons  v.  Vulcan  Oil  Co.,  61 
Penn.  202. 

53.  Burbank  v.  Dennis,101  Cal.90. 

54.  Eight  of  corporation  to  ben- 

efit of  optional  purchase 
made  by  promoter  before 
becoming  such. 

55.  Offer  by  promoter  to  corpo- 

ration entitling  it  to  benefit 
of  his  purchase. 

56.  Plaquemines    Tropical   Fruit 

Co.  v.  Buck,  52  N.  J.  Eq.  219. 

57.  Pittsburg      Mining     Co.     v. 

Spooner,  74  Wise.  307. 

58.  Right  of  corporation  to  bene- 

fit of  optional  purchase 
made  by  third  persons  con- 
federating with  promoter. 


§  59.    Fountain  Spring  Park  Co.  v. 
Roberts,  92  Wise.  345. 

60.  Right  of  corporation  to  re- 

cover the  profit  made  by 
promoter  on  a  sale  of  his 
property  to  it.  Definition 
of  term  "profit." 

61.  Recovery  of  profit  when  prop- 

erty sold  is  a  commodity 
having  a  current  market 
price. 

62.  Recovery  of  profit  when  prop- 

erty sold  is  not  a  com- 
modity with  current  market 
price. 


ARTICLE  II.  —  ACCOUNTABILITY    OF    PROMOTERS    FOR    GIFTS    AND 

COMMISSIONS 71 


§  63.    Explanation  of  term  "  promo- 
tion money." 

64.  Accountability  of  promoters 

for  promotion  money. 

65.  Hichens  v.  Congreve,  4  Russ. 

562  ;  1  Russ.  &  Myl.  150,  n. 

66.  Beck  v.  Kantorowicz,  3  Kay 

&  J.  230. 

67.  Lyclney  &  Wigpool  Iron  Ore 

Co.  v.  Bird,  33  Ch.  D.  85. 

68.  Bagnall  v.  Carlton,  6  Ch.  D. 

371. 

69.  Emma  Silver  Mining  Co.  v. 

Grant,  11  Ch.  D.  918. 

70.  Emma  Silver  Mining  Co.  v. 

Lewis,  4  C.  P.  D.  396. 

71.  McElheney's  Appeal,  61  Penn. 

188. 

72.  Chandler  o.  Bacon,  30  Fed. 

Rep.  538. 


§  73.  In  re  Westmoreland  Green  & 
Blue  Slate  Co.,  2  Ch.  (1893) 
612. 

74.  Yale  Gas  Stove  Co.  v.  Foley, 

64  Conn.  105. 

75.  Right  of  corporation   to  re- 

cover from  vendor  promo- 
tion money  which  he  has 
secretly  agreed  to  pay  to 
promoter. 

76.  Accountability  to  corporation 

of  persons  confederating 
with  promoters. 

77.  Right  of   corporation   to  re- 

cover from  promoters  gifts 
and  commissions  not  ob- 
tained at  its  expense. 

78.  In  re  North  Australian  Terri- 

tory Co.,  1  Ch.  (1892)  322. 


CONTENTS. 


CHAPTER  IY. 


MEASURE  OP  PROFITS  RECOVERABLE  BY  CORPORATION.  — 
STATUTE  OF  LIMITATIONS  AS  A  BAR  TO  SUIT  FOR  THEIR 
RECOVERY.  —  SURVIVAL  OF  CAUSE  OF  ACTION 


89 


§  79.    View  that  net  profit  only  re- 
coverable. 

80.  Modification  of  this  view. — 

No  allowance  for  expendi- 
tures ultra  vires  the  corpo- 
ration. 

81.  English  decisions    based  on 

provisions  of  the  Compa- 
nies Acts. 

82.  Interest  recoverable. 

83.  Rule  when  gift,  commission, 

or  profit  is  in  form  of  shares 
of  corporation's  stock. 

84.  Statute  of  Limitations  as  a  bar 

to  suit  to  recover  profits. 


§  85.    Metropolitan  Bank  v.  Heiron, 
6  Ex.  D.  319. 

86.  Statute  runs  from  time  of  dis- 

closure to  or  knowledge  by 
corporation. 

87.  In  re  Fitzroy  Bessemer  Steel 

Co.  v.  Smith,  50  L.  T.  Rep. 
N.  s.  144. 

88.  Right  of  action  not  divested 

short  of  period  of  statute 
without  accord  and  satisfac- 
tion or  release  under  seal. 

89.  Right     of     action     survives 

against  personal  represen- 
tatives of  promoters. 


CHAPTER  V. 

BREACH  OF  DUTY  OR  FRAUD  BY  PROMOTERS  AS  GROUND 
FOR  RECOVERY  OF  DAMAGES  FROM  THEM  BY  CORPORA- 
TION, AND  FOR  PROCURING  THE  SETTING  ASIDE  OF  EXE- 
CUTED CONTRACTS  ENTERED  INTO  BY  IT  .  .  98 


ARTICLE  I.  —  LIABILITIES  OF  PROMOTERS  IN  DAMAGES  TO  THE 
CORPORATION. 


90.  Rule  laid  down  in  Taylor  on 

Corporations. 

91.  Damages      recoverable     for 

breach  of  duty  damnifying 
corporation. 


§  92.  Instances  where  promoters 
liable  to  corporation  in 
damages. 


CONTENTS. 


ARTICLE    II.  —  RESCISSION    BY    CORPORATION    OP    CONTRACTS   EN- 
TERED  INTO   BY    IT    WITH   OR   THROUGH  PROMOTERS      .  102 


93.  Rescission    an  elective   rem- 

edy. 

94.  Rescission    of    contracts    on 

ground  of  breach  of  duty 
by  promoters. 

95.  Erlanger   v.  New    Sombrero 

Phosphate  Co.,  3  App.  Cas. 
1218. 

96.  Atwool    v,   Merryweather,   5 

Eq.  464,  n. 

97.  Phosphate     Sewage    Co.    v. 

Hartmont,  6  Ch.  D.  394. 

98.  Caveat  emptor  not  applicable 

to    dealings  by  promoters 
with  corporation. 


100. 


101. 


102. 


103. 
104. 


Rescission  by  corporation  of 
transactions  with  third  per- 
sons on  ground  of  partici- 
pation by  such  persons  in 
frauds  of  promoters. 

Election  by  corporation  to  con- 
firm or  rescind  contract. 

Right  to  rescind  barred  by 
laches. 

Return  of  consideration  re- 
ceived ordinarily  condition 
precedent  to  right  to  re- 
scind. Exceptions. 

Partial  rescission  not  allowed. 

Burden  of  proof  in  suit  for 
rescission. 


CHAPTER  VI. 

SUITS  BY  SHAREHOLDERS  TO  COMPEL  REDRESS  FOR  WRONGS 
BY  PROMOTERS  TO  THE  CORPORATION 114 


§  105.  As  general  rule  suit  can  be 
brought  only  by  corpora- 
tion. 

106.  Exceptions  to  this  rule. 

107.  Proof  necessary  to  establish 

disability  of  corporation 
to  sue. 

108.  Transactions  on  account  of 

which  shareholders  may 
or  may  not  bring  suit. 

109.  Exposition  of  rule  on   this 

subject  by  Lords  Justices 
James  and  Mellish. 

110.  Right  of  minority  sharehold- 

ers to  sue  to  rescind  trans- 
action voidable  for  fraud, 
when  majority  are  the 
wrong-doers. 


§  111.    Atwool  v.  Merryweather,  5 
Eq.  464,  n. 

112.  Mason  v.  Harris,  11  Ch.  D. 

97. 

113.  Right    of   minority,    where 

majority  are  not  the 
wrong-doers,  to  sue  to 
rescind  contracts  voidable 
for  fraud. 

114.  Foss  v.  Harbottle,  2  Hare, 

461. 

115.  Right  of  minority  to  sue  to 

rescind  a  voidable  trans- 
action where  there  is  no 
fraud. 

116.  Right  of  minority  to  sue  for 

recovery  of  secret  profits 
obtained  by  promoters. 


Xll 


CONTENTS. 


§  117.  Majority  not  allowed  to 
retain  profits  wrongfully 
obtained  at  expense  of 
minority. 

118.  Bight  of  minority  to  sue 
for  recovery  of  promoter's 
profits  on  sale  to  corpora- 
tion at  fraudulently  ex- 
cessive price. 


§  119.  Shareholder  whose  shares 
have  been  voted  on  in 
favor  of  a  transaction  can- 
not maintain  suit  based 
upon  it. 

120.  Rule  in  Federal  Courts. 

121.  Shareholders'   suit  may  be 

barred  by  laches. 

122.  Form  of  shareholders' suit. — 

Necessary  parties. 


CHAPTER    VII. 

PAGE 

LIABILITY  OF  PROMOTERS  TO  ACCOUNT  FOR  PROFITS,  COM- 
MISSIONS, AND  GIFTS,  OR  IN  DAMAGES  TO  SHAREHOLDERS 
OF  THE  CORPORATION .  .  131 


ARTICLE    I.  —  LIABILITY    TO  ACCOUNT  FOR  PROFITS,   GIFTS,  AND 
COMMISSIONS. 


123.  Effect  of  invitation  by  pro- 
moters to  others  to  join 
them  in  acquiring  property, 
and  to  become  shareholders 
in  corporation  to  be  formed 
to  purchase  it. 


§  124.   Emery  v.  Parrott,  107  Mass. 
96. 

125.  Getty  v.   Devlin,    54  N.   Y. 

403  ;  70  N.  Y.  504. 

126.  Rule  as  to  joinder  of  plain- 

tiffs in    suit    against    pro- 
moters for  an  accounting. 


ARTICLE  II.  —  LIABILITY    IN    DAMAGES   WHEN    IN    A    FIDUCIARY 

POSITION  TOWARD  SHAREHOLDERS 135 


§  127.  When  such  relation  exists 
between  promoters  and 
shareholders,  former  li- 
able to  latter  in  damages 
for  breach  of  fiduciary 
duty  to  them. 


§  128.    Brewster  v.  Hatch,  122  N. 

Y.  349. 

129.     Teachout  v.  Van  Hoesen,  76 
Iowa,  113. 


CONTENTS. 


Xlll 


ARTICLE  III.  —  PROMOTERS'  LIABILITY  IN  DAMAGES  WHEN  NOT  IN  A 

FIDUCIARY  POSITION  TOWARD  SHAREHOLDERS 140 


§  130.  Promoters  ordinarily  not  in 
fiduciary  position  toward 
subscribers  for  shares. 

131.  When  action  will  lie  in  favor  of 

subscribers  against  promo- 
ters for  misrepresentations. 

132.  Misrepresentation    must    be 

assertion  of  fact. 

133.  Mere  commendatory  expres- 

sions privileged. 

134.  Representation  as  to  value  in 

exceptional  circumstances 
not  privileged. 

135.  Representation    as    to  price 

paid  by  third  persons  for 
shares  or  as  to  cost  of 
company's  property  not 
privileged. 

136.  Commendatory     expressions 

in  prospectuses. 

137.  Expressions    of   opinion,   al- 

though untrue,  not  action- 
able. 

138.  Representations  as  to  the  law. 

139.  Representation  must  be  of  a 

material  fact. 

140.  Promoters  as  a  rule  not  lia- 

ble to  purchasers  of  shares 
for  misrepresentation  in 
prospectus  addressed  by 
them  to  prospective  sub- 
scribers for  shares. 

141.  But  connection  between  pro- 

moters issuing  prospectus 
and  persons  purchasing 
shares  in  reliance  upon  it 
may  be  shown. 

142.  Andrews  v.  Mockford,  1  Q.  B. 

(1896),  372. 

143.  Representation      must      be 

fraudulent  as  well  as  false. 
Facts  to  be  proved  to  es- 
tablish fraud. 

144.  False  representation  made  as 

of  one's  own  knowledge 
deemed  fraudulent. 

145.  Absence        of       reasonable 

grounds  for  belief  in  repre- 
sentation evidence  that  it 
is  fraudulent. 


§  146.  Effect  of  subsequent  discov- 
ery by  one  who  has  made 
representation  that  it  is 
untrue. 

147.  Fraud  may  be  inferred  from 

concealment  as  distin- 
guished from  non-disclos- 
ure of  material  facts. 

148.  Circumstances   under   which 

non-disclosure  of  facts  may 
make  facts  stated  false. 

149.  Omission  of   facts  from  pro- 

spectus not  ground  for 
action  of  deceit,  unless  it 
makes  facts  stated  false. 

150.  Peek  v.  Gurney,  L.  R.,  6  H. 

L.  377. 

151.  Statement  of  portion  of  truth 

with  suggestions  and  infer- 
ences rendered  credible 
only  by  suppression  of 
other  portions  of  truth. 

152.  Rules  as  to  misrepresentation 

and  non-disclosure  not  the 
same  in  actions  ex-delicto 
as  in  suits  for  equitable 
relief. 

153.  No  legislation  in  this  country 

requiring  promoters'  agree- 
ments to  be  disclosed  in 
prospectuses. 

154.  English  statute  on  subject. 

155.  Right  of  subscriber  to  rely  on 

representations  addressed 
to  him. 

156.  Liability  of  promoters  on  sale 

of  shares  issued  to  them  at 
discount  or  in  payment  for 
property  at  overvaluation. 

157.  Liability    of   promoters    for 

misrepresentations  made 
by  co-promoters. 

158.  Conflicting  views  as  to  meas- 

ure of  damages. 

159.  Rule   in   Massachusetts   and 

other  jurisdictions. 

160.  Rule  in  New  Jersey. 

161.  Rule  laid  down  in  England 

and  by  Supreme  Court  of 
United  States. 


XIV 


CONTENTS. 


CHAPTER  VIII. 

LIABILITY  OF  PROMOTERS  TO  SUBSCRIBERS  FOR  SHARES  IN 
A  PROJECTED  CORPORATION  WHICH  PROVES  ABORTIVE  . 


169 


§  162.  Promoters,  in  such  case,  may 
be  liable  to  refund  moneys 
paid  in  advance  on  shares 
by  subscribers. 

163.  No  deduction  allowed  for  ex- 

penses, unless  subscriber 
has  authorized  deposit  to 
be  applied  thereto. 

164.  What  subscriber  must  prove 

in  order  to  recover  from 
promoters. 


§  165.     Burnside  v.  Dayrell,  3  Ex. 
224. 

166.  Criticism  of  Burnside  v.  Day- 

rell. 

167.  Subscriber  has  no  lien  on 

moneys  advanced  as 
against  creditors  of  com- 
pany. 

168.  Subscriber's    remedy   is    at 

law,  unless  fraud  shown, 
or  accounting  necessary. 

169.  Apperly  v.  Page,  1  Phill.  779. 


CHAPTER  IX. 

PAGE 

REMEDIES   OF   SUBSCRIBERS  FOR  SHARES  AGAINST  CORPO- 
RATION   WHEN   MISLED    BY   MISREPRESENTATIONS    MADE 

BY    PROMOTERS    OR    BY    THEIR    NON-DISCLOSURE    OF 
MATERIAL  FACTS .          .     176 


ARTICLE  I.  —  LIABILITY    OF    CORPORATION    IN    DAMAGES    FOR 
FRAUDULENT  MISREPRESENTATIONS  MADE  BY  PROMOTERS. 


§  170.    Action    of    deceit    will  lie 

against  a  corporation. 
171.     Corporation   not   liable    in 
damages  for  frauds  com- 
mitted by  promoters  prior 
to  its  formation. 


§  172.  Effect  of  insolvency  of  cor- 
poration on  right  of  suit 
by  subscriber  against  it  to 
recover  damages. 


CONTENTS. 


XV 


ARTICLE  II.  —  MISREPRESENTATION  OR  NON-DISCLOSURE  OF  MA- 
TERIAL FACTS  BY  PROMOTERS  AS  GROUND  FOR  RESCISSION  OF 
SUBSCRIPTIONS  FOR  SHARES,  OR  AS  A  DEFENCE  TO  SUITS  THEREON 
BY  THE  CORPORATION 179 


§  173.  Responsibility  of  corpora- 
tion for  misrepresentation 
or  non-disclosure  by  pro- 
moters before  corporation 
formed. 

174.  Subscribers'    remedies 

against  corporation  for 
fraudulent  misrepresenta- 
tion by  promoters. 

175.  Remedy    when    misled    by 

non-disclosure  of  facts  by 
promoters. 

176.  Dicta  of    Vice  Chancellor 

Kindersley. 

177.  Dicta  of  Lord  Chelmsford. 

178.  Standard  of  duty  as  to  dis- 

closure required  by  dicta 
quoted.  Whether  legal  or 
moral  duty. 

179.  Peek   v.    Gurney,  L.   R.   6 

H.  L.  377. 

180.  Duty  to  disclose    material 

facts  not  a  legal  duty, 
when  omission  does  not 
make  facts  stated  false. 

181.  Absence  of  direct  decisions 

on  this  point.  Reasons 
for  and  against  require- 
ment of  disclosure. 

182.  Contracts    to    take    shares 

governed  by  maxim  caveat 
emptor. 

183.  Views  of  Brett,  J.,  expressed 

in  Gover's  Case,  1  Ch.  D. 
182. 


185. 


186. 


187. 


188. 


189. 


190. 


191. 


193. 


Relief  obtainable  in  Equity, 
and  in  some  jurisdictions 
at  law,  against  innocent 
misrepresentation. 
No  relief  at  law  where  dis- 
tinction in  procedure  be- 
tween action  at  law  and 
suit  in  Equity  adhered  to. 
Principle  on  which  Equity 
rescinds  or  refuses  to  en- 
force contract  induced  by 
innocent  misrepresenta- 
tion. 

Proof  necessary  to  obtain  re- 
scission of  contract  of  sub- 
scription on  ground  of  in- 
nocent misrepresentation. 
Laches  as  a  bar  to  rescis- 
sion of  contract  of  sub- 
scription. 

Waiver  of  right  to   avoid 
subscription  on  ground  of 
misrepresentation. 
Burden  of  proof  on  question 

of  laches  or  waiver. 
Rule  in  England  as  to  effect 
of    corporate    insolvency 
on  right  to  rescind  con- 
tract of  subscription. 
Tendency    of    decisions   in 

this  country. 

Repudiation  of  contract  of 
subscription  without  suit 
for  rescission  effective, 
although  corporate  insol- 
vency proceedings  subse- 
quently begun. 


XVI 


CONTENTS. 


CHAPTER  X. 

PAGE 

RIGHTS  AND  LIABILITIES  OF  CORPORATION  ON  PROMOTERS' 

CONTRACTS 198 


ARTICLE  I.  —  ENFORCEMENT  BY  OR  AGAINST  THE  CORPORATION  OP 
CONTRACTS  MADE  IN  ITS  NAME  AND  FOR  ITS  BENEFIT  BY  ITS 
PROMOTERS  BEFORE  IT  COMES  INTO  EXISTENCE. 


§  194.  Such  contracts  as  a  rule 
primarily  not  binding 
upon  or  enforceable  by 
the  corporation. 

195.  Penn  Match  Co.  v.  Hapgood, 

141  Mass.  145. 

196.  Long   v.   Citizens'  Bank,  8 

Utah,  104. 

197.  Gooday   v.   Colchester,    &c. 

Ry.  Co.,  17  Beav.  132. 

198.  Buffington    v.    Barden,    80 

Wise.  635. 

199.  By  weight  of  authority,  cor- 

poration cannot  ratify 
contract  made  for  it  be- 
fore its  creation. 

200.  Doctrine  held  by  Lord  Cot- 

tenham. 

201.  Decisions  of  Lord  Cottenham 

questioned. 

202.  Corporation  may  accept  or 

adopt  contracts  made  for 
it  prior  to  its  creation. 

203.  Effect  of  such  adoption  or 

acceptance. 

204.  Acceptance  or  adoption  may 

be  express. 

205.  Stanton    v.    New    York    & 

Eastern  R.  R.  Co.,  59 
Conn.  272. 

206.  Acceptance  or  adoption  by 

corporation  may  be  in- 
ferred from  its  acts. 


§  207.  Taking  benefit  of  contract 
may  be  evidence  of  ac- 
ceptance or  adoption. 

208.  Circumstances  under  which 

it  establishes  acceptance 
or  adoption. 

209.  Battelle      v.    Northwestern 

Cement  &  Concrete  Pave- 
ment Co.,  37  Minn.  89. 

210.  Pittsburg  &  Tennessee  Cop- 

per Co.  v.  Quintrell,  91 
Tenn.  693. 

211.  Acceptance  by  corporation 

of  subscriptions  for  shares 
made  before  its  forma- 
tion. 

212.  Cases  in  which  term  ratifica- 

tion used  in  sense  of  adop- 
tion or  acceptance. 

213.  Paxton  Cattle  Co.  v.  First 

National  Bank  of  Arrapa- 
hoe,  21  Neb.  621. 

214.  Distinction  between  ratifica- 

tion and  adoption  or  ac- 
ceptance. 

215.  English  doctrine  as  to  pro- 

moter's contracts. 

216.  Howard    v.    Patent    Ivory 

Mfg.  Co.,  38  Ch.  D.  156. 

217.  Corporation    cannot    adopt 

or  accept  ultra  vires  con- 
tracts. 


CONTENTS. 


XV11 


ARTICLE  II.  —  LIABILITY  OF  CORPORATION  TO  PAT  ITS  PROMOTERS 
'  OR  PERSONS  EMPLOYED  BY  THEM,  FOR   SERVICES  AND  EXPENSES 
INCIDENT  TO  ITS  FORMATION 220 


§  218.     Statutory  liability. 

219.  Liability  under  the  English 

Companies  Acts. 

220.  Melhado    v.    Porte    Allegre, 

New  Hamburgh.  &  Brazil- 
ian Ry.  Co.,  L.  R.  9  C.  P. 
603. 

221.  Liability  on  quantum  meruit. 


§  222.  Doctrines  held  in  this  coun- 
try as  to  liability  of  corpo- 
ration. 

223.  Liability  to  pay  for  services 

and  expenses  in  obtaining 
subscriptions  for  shares. 

224.  Doctrine   held   in   Vermont 

and  New  Hampshire. 


CHAPTER   XI. 

RIGHTS  AND  LIABILITIES  OF  PROMOTERS  UNDER  CONTRACTS 
MADE  BY  THEM,  OR  BY  THEIR  Co-PROMOTERS,  IN  BEHALF 
OF  OR  FOR  THE  BENEFIT  OF  A  PROJECTED  CORPORA- 
TION.—  CONTRACTS  BETWEEN  PROMOTERS  ......  228 


§  225.  Promoter  not  liable  on  con- 
tract made  in  name  of  in- 
tended corporation,  unless 
he  agreed  to  be  so. 

226.  Presumption  as  to  intent  of 

parties. 

227.  Landman  v.  Entwistle,  7  Ex. 

632. 

228.  On  written  contract  question 

of  intent  is  for  the  Court. 
—  Kelner  v.  Baxter,  L.  R. 
2  C.  P.  174. 

229.  Scott  v.  Ebury,  L.  R.  2  C.  P. 

255. 

230.  Promoter  usually  not  liable 

on  contract  made  in  name 
of  corporation.  —  Liable 
for  misrepresentation  as  to 
existence  of  corporation. 

231.  Effect  of  adoption  by  corpo- 

ration of  contract  on  which 
credit  was  given  to  pro- 
moter. 

232.  Abbott    v.     Hapgood,     150 

Mass.  248. 

233.  Promoters   not   prima  facie 

partners. 


§  234.  English  cases  as  to  liability 
of  promoters  on  contracts 
made  by  co-promoters. 

235.  Ordinarily  promoter  not  li- 

able from  allowing  his 
name  to  appear  in  pro- 
spectus or  signing  articles 
of  incorporation,  if  he  does 
not  act  in  undertaking. 

236.  Statements     in    prospectus 

in  which  promoter  allows 
his  name  to  be  used  may 
impose  liability  upon 
him. 

237.  When  promoter  has  acted  in 

undertaking,  question  for 
jury  whether  he  has  au- 
thorized co-promoters  to 
bind  him. 

238.  Riley  v.  Packington,  L.  R. 

2  C.  P.  536. 

239.  Promoter's  liability  on  con- 

tract made  before  he  be- 
came a  promoter.  —  Effect 
of  admission  of  liability. 

240.  To  hold  promoter,  credit  must 

have  been  given  to  him. 


XV111 


CONTENTS. 


§  241.    Joint  liability  of  promoters. 
—  Effect  of  release  of  one. 

242.  Right  of  promoter  to  indem- 

nity from  co-promoters. 

243.  Right  of  promoter  to  contri- 

bution from  co-promoters. 

244.  Batard  v.  Hawes,  2  El.  &  B. 

287. 

245.  In    absence  of    agreement, 

promoter  cannot  enforce 
payment  for  services  from 
co-promoters. 


§  246.  No  contract  between  pro- 
moters to  go  forward  im- 
plied from  their  association 
together. 

247.  Legality  of  agreements  be- 

tween promoters  as  to 
formation  of  corporation 
and  its  future  management 
and  control. 

248.  Agreement  between  promo- 

ters restricting  sale  of 
their  stock. 


CHAPTER   XII. 


RIGHTS  AND  LIABILITIES  UNDER  CONTRACTS  MADE  BY 
PROMOTERS  CLAIMING  TO  BE  INCORPORATED  WHEN 
THE  PROCEEDINGS  TAKEN  TO  INCORPORATE  HAVE  BEEN 
DEFECTIVE  OR  ILLEGAL  .  250 


§  249.  Question  as  to  consequences 
of  illegal  or  defective  in- 
corporation by  promoters. 

250.  Theory  that  corporation  can- 

not come  into  existence 
without  substantial  com- 
pliance with  enabling  stat- 
ute. 

251.  Conclusiveness  of  certificate 

of  incorporation. 

252.  Nature  and  attributes  of  a 

de  facto  corporation. 

253.  Promoters  and  stockholders 

of  a  de  facto  corporation 
not  liable  for  its  debts. 

254.  What  is  necessary  to  consti- 

tute a  de  facto  corporation. 

255.  A  valid  enabling  statute. 

256.  Color  of  apparent  organiza- 

tion under  statute  and  user. 

257.  Effect  of  apparently  real  but 

in  fact  sham  or  fraudulent 
compliance  with  require- 
ments of  statute. 

258  Construction  of  statute  by 
courts  of  State  where  en- 
acted followed  by  courts 
of  other  States. 


§  259.  Incorporation  for  apparently 
lawful,  but  in  reality  un- 
lawful purpose,  will  not 
protect  promoters. 

260.  Rule      when       corporation 

formed  in  good  faith  for 
lawful  purpose. 

261.  Estoppel  to  deny  corporate 

existence.  Estoppel  of  the 
alleged  corporation. 

262.  Estoppel  of  stockholders  and 

promoters. 

263.  Estoppel  of  persons  dealing 

with  association  as  a  cor- 
poration. 

264.  Estoppel  to  deny  corporate 

existence  of  association  in 
order  to  hold  members  in- 
dividually liable  on  its 
contracts. 

265.  Rights  and  liabilities  under 

contracts  by  or  with  asso- 
ciation acting  as  a  corpo- 
ration, when  there  is  no 
estoppel  and  no  corporate 
existence  even  de  facto. 


INDEX 


277 


TABLE   OF   CASES. 


[References  are  to  Sections.] 


AARON'S  Beefs  Co.  v.  Twiss  136,  151, 
155,  178,  188,  190 

Abbott  v.  Hapgood    194, 199, 21 5, 232 
v.  Merriam  105 

v.  Omaha  Smelting  Co.    250,  265 
Adamantine  Brick  Co.  v.  Woodruff 

107 

Addlestone  Linoleum  Co.,  In  re    172 
JEtna.  Ins.  Co.  v.  Reed 
Aldham  v.  Brown  163 

Alexander  v.  Searcy  107,  119 

Allen  v.  Curtis  105,  107 

v.  Long  256 

Ambrose  Lake  Tin  &  Copper  Min- 
ing Co.,  In  re        28,  39,  46,  47,  156 
American  Loan   &  Trust   Co.  v. 

Minnesota  &  N.  W.  R.  R.  Co.     255 
American  Mortgage  Co.  of  Scot- 
land v.  Ternilfe  250 
American  Salt  Co.  v.  Heidenhei- 

mer  253,  257,  264 

Anderson  v.  Hill  133 

Andrew  v.  Ted  ford  225 

Andrews  v.  Mockford  142 

Angus  v.  Clifford  143 

Apperly  v.  Page  169 

Arkwright  v.  Newbold     63,  130,  146, 
148,  149,  180 

Ashley's  Case  188 

Ashmead  v.  Colby  192 

Ashpitel  v.  Sercombe  163 

Ashuelot  Boot  &  Shoe  Co.  v.  Hoit  211 
Ashurst's  Appeal  84 

Atchison,  Topeka  &   Santa  Fe 

R.  R.  Co.  v.  Davis  260 

Athol  Music  Hall  Co.  v.  Carey  211 
Atlantic  Bank  v.  Harris  86 

Attorney  General  v.  Hanchett  250 
Atwool  v.  Merryweather  96,  111,  112 
Auburn  Academy  v.  Strong  107 

Avery  v.  Chapman  144 

v.  Ryan  246 


BABCOCK  v.  Case  102 

Bagnall  v.  Carlton     12,  32,  64,  68,  77, 

79 


Bailey  v.  Birkenhead  Ry.  Co.        122 

v.  Burgess  245 

v.  Macaully        235,  238,  239,  240 

Baird  o.  Ross  163 

Bank  of  Scotland  v.  Addie  170 

Bank  of  Shasta  v.  Boyd  263 

Barker  v.  Stead  235 

Barr  v.  New  York,  Lake  Erie  & 

Western  R.  R.  Co.  100,  119 

Barry  v.  Croskey  140 

Bartholomew  o.  Bentley  140 

v.  Bushnell  144 

Bartlett  v.  Tucker  230 

Batard  v.  Hawes  244 

Battelle  v.  Northwestern  Cement 

&  Concrete  Pavement  Co.  194, 
202,  209 

Batthyany  v.  Walford  89 

Baxter  v.  Moses  ,  84 

Bay  v.  Cook  225 

Bayless  w.  Orne  107 

Beal  v.  Bass  262 

Beale  v.  Monk  239 

Beck  v.  Kantorowicz  66 

Bedford  v.  Bagshaw  137 

Beetenn  v.  Burkholder  102 

Belav  v.  Bryan  173 

Bell's  Appeal  211 

Bell's  Gap  R.  R.  Co.  v.  Christie  222 
Bellairs  v.  Tucker  155 

Bennett  v.  Gibbons  155 

Benson  v.  Heathorn  31,  45 

Bentinck  v.  Fenn  61,  62,  91, 

104 

Bergen  v.  Porpoise  Fishing  Co.  194 
Berry  v.  Whitney  138 

Bethell  v.  Bethell  138 

Bigelow  v.  Gregory  250,  265 

Bird's  Case  251 

Bird  v.  Kleiner  144 

Bivleh-y-plom  Lead  Mining  Co.  v. 

Baynes  174 

Bjorngaard  v.  Goodhue  County 

Bank  107 

Blain  v.  Agar  168 

Blanchard  v.  Kaull  266 

Bloomer  v.  Gray  134 


XX 


TABLE   OF  CASES. 
[References  are  to  Sections.] 


Bluehill  Academy  v.  Witham        194 
Bodley  v.  McChord  102 

Bonaparte  v.  Baltimore,  Hampden 

&  Lake  Roland  R.  R.  Co.  250 

Boomer  v.  American   Spiral   Co. 

202,  210 

Bosher  v.  Richmond  &  Harrison- 
burg  Land  Co.  1,  174 
Bosley  v.  National  Machine  Co.     170 
Boston  v.  Simmons                59,  76,  91 
Boston  Rubber  Shoe  Co.  v.  Boston 

Rubber  Co.  251 

Boughton  v.  Standish  188 

Boulton  v.  Peplow  243 

Bower  v.  Fenn  144 

Boyce  v.  Trustees  of  Towsonton 
Station  of  M.  E.  Church  250, 

261 

Boyd  v.  Sims  107 

Bradenstein  v.  Hoke  255,  263 

Bradford  v.  Harris  162 

Bradley  v.  Poole  137 

Brampton  Ry.  Co.,  In  re  194 

Brewer  v.  Boston  Theatre  Co.     107, 

113 

Brewster  v.  Hatch  128 

Brickley  v.  Edwards  263 

Briggs  v.  Withey  99 

Bright  v.  Hutton  233,  243 

British  Seamless  Paper  Box  Co., 

In  re  40 

Broughton  v.  Broughton  78 

Brown  v.  Castles  133 

v.  Duluth,  &c.  R.  R.  Co.          119 
Browne  v.  La  Trinidad  219 

Browning  v.  Great  Central  Mining 

Co.  210 

Brownlow  v.  Cauthers  155 

Bruner  v.  Brown  212 

Bryant  v.  Ocean  Ins.  Co.  132 

Buffalo  &  Allegheny  R.  R.  Co.  v. 

Cary  256 

Buffalo  &  Jamestown  R.  R.  Co.  v. 

Gifford  211 

Buffalo  &  Pittsburgh  R.  R.  Co.  v. 

Hatch  249, 261 

Buffington  v.  Barden  194,  198 

Burbank  v.  Dennis  29,  46,  53 

Burbridge  v.  Morris  238 

Burgess  v.  Sherman  241 

Burnes  v.  Pennell  173 

Burns  v.  Lane  138 

Burnside  n.  Dayrell  165,  166 

Burr  v.  McDonald  107 

Buschman  v.  Codd  161 

Bushnell  v.  Consolidated  Ice  Ma- 
chine Co.  256 
Butchers  &  Drovers'  Bank  v.  Mc- 
Donald 263 
Butt  v.  Monteaux  168 


CABOT  v.  Chester  144 

Caldwell  v.  Henry  144 

Caledonian,  &e.  Ry.  Co.  v.  Hellens- 

burg  194, 201 

Callender  v.  Plainsville  &  Hudson 

R.  R.  Co.  261 

Campau  v.  Van  Dyke  101 

Campbell  v.  Fleming  137 

Cape  Breton  Co.,  In  re  46,  61,  62 
Capel  v.  Sims  Ships  Compositions 

Co.  80 

Capper's  Case  233 

Carey  v.  Des  Moines  Coal  &  Min- 
ing Co.  194 
Cargill  v.  Bower  157 
Carling  v.  London  &  Leeds  Bank 

172,  191 

Case  Mfg.  Co.  v.  Soxman  226,  231 
Caseaux  n.  Mali  140 

Casey  v.  Galli  251,  262,  263 

Cassidy  v.  Globe  Rubber  Co.  170 
Castner  v.  Walrod  101 

Caswell  v.  Hunton  135,  139 

Catlin  v.  Green  121 

Cedar  Rapids  Ins.  Co.  v.  Butler    188 
Central  Agricultural   &   Mechan- 
ical   Association    v.    Alabama 
Gold  Life  Ins.  Co.  252 

Central    City   Savings    Bank    v. 

Walker  265 

Central  Land  Co.  v.  Obenchain  6 
Central  Ry.  Co.  of  Venezuela  v. 

Kisch  136,  148,  155,  177,  188 

Chandler  v.  Bacon  32,  72,  83 

Chaplin  v.  Clark  162 

Charles  River  Bridge  Co.  v.  War- 
ran  Bridge  257 
Chatham  Furnace  Co.  v.  Moffatt 

144 

Cheney  v.  Gleason  92,  98,  127,  129 
Chester  v.  Comstock  144 

Chicora  Co.  v.  Crews  255 

Childs  v.  Kurd  250 

Chubb  v.  Upton  192 

Clark  v.  American  Coal  Co.  119 

v.  Jones  264 

Clarke  v.  Dickson  102,  135 

Clegg    v.    Hamilton     &     Wright 

Grange  Co.  250,  265 

Clements  v.  Bowes  169 

Clinch  v.  Financial  Corporation  113 
Close  v.  Glenwood  Cemetery  263 
Clough  v.  London  &  Northwestern 

Ry.  Co.  100 

Cochran  v.  Arnold  253,  257 

Coil  v.  Pittsburgh  Female  College 

130 

Cole  v.  O'Brien  225 

Coleman  v.  Coleman  265 

Coles  v.  Kennedy  139,  148 


TABLE   OF   CASES. 
[References  are  to  Sections.] 


XXI 


Collen  v.  Wright  230 

Collingwood  v.  Berkley  236 

Collins  v.  Townsend  188 

Colorado   Land   &   Water  Co.  v. 

Adams  205 

Colt  v.  Clapp  123 

v.  Woolaston  168 

Colton  v.  Stamford  155 
Columbia  Electric  Co.  v.  Dixon  252 
Commercial  Bank  of  Keokuk  v. 

Pfeiffer  263 

Concha  v.  Marietta  89 

Cook  v.  Tullis  199 

Coolidge  v.  Goddard  135 

Cooper  v.  Schlesinger  144 

Cornell  v.  Hay  154 

Cortes  v.  Thanhauser  98 

Cowley  v.  Smith  144 

Cox  v.  Montgomery  101 

Coxe  v.  State  255 

Craig  v.  Phillips  154 

Craigie  v.  Hadley  170 

Cross  v.  Sackett  140,  141,  156 
Grossman  v.  Penrose  Ferry  Bridge 

Co.     .  137 
Crow  v.  Green  246 
Crown  v.  Brown  144 
Croyle  v.  Moses  147 
Crump  v.  U.  S.  Mining  Co.  174 
Cunningham  v.  Edgefield  &  Ken- 
tucky R.  R.  Co.  192 
v.  Pell  122 
Gushing  v.  Wyman  102 


DALE  &  Plant  Co.,  In  re  199 

Danforth  v.  Gushing  155 

Davis  v.  Betz  138 

v.  Dexter  Butter  &  Cheese 

Co.  205 

v.  Gemmell  121 

v.  Hamlin  42 

v.    Montgomery    Furnace    & 

Chemical  Co.  212 

v.  Stuard  100 

Dawe  v.  Morris  132 

De  Bussche  v.  Alt  85,  88 

De  Ruvignes'  Case  83 

Demarest  v.  Flack  257 

Deming  v.  Darling  133 

Denny  v.  Gilman  151 

Densmore   Oil  Co.  v.  Densmore 

27,  29,  38,  39,  46,  62 
Denton  v.  Great  Northern  Ry.  Co. 

140 

v.  MacNeil  136,  168 

Deposit  Life  Ins.  Co.  v.  Ayscough 

174 
Derry  v.  Peek  130,  143,  181 


Dimmock  v.  Hallett  133 

Dimpfel  v.  Ohio  &  Mississippi  Ry. 

Co.  120,  121 

Dole  v.  Wooldredge       123,  126,  233, 

235 

Dooley  v.  Cheshire  Glass  Co.         261 
Doran  v.  Eaton  133 

Dorris  v.  French  54,  181 

Dorsey  Match  Co.  v.  McCaffrey 

170,  172 

Drouet  v.  Taylor  165 

Duffield  v.  E.  T.  Barnum  Wire  & 

Iron  Works  188,  192 

Duggan  v.  Colorado  Mortgage  & 

Investment  Co.     252,  253,  256,  257 
Duke  v.  Taylor  264,  265 

Duncan  v.  Niles  230 

Dunphy  v.  Traveller  Newspaper 

Association  107, 108,  121 

Duranty's  Case  173 

Duvergier  v.  Fellows  156 

Dynes  v.  Schaffer  188 


EAGLESFIELD  v.  Londonderry        138 
Eakright    v.    Logansport,    &c. 

R.  R.  Co.  249 

Earl  Lindsey  v.  Capper  201 

v.  Great  Northern  Ry.  Co.      201 
Earl  of    Shrewsbury  v.    North 

Staffordshire  Ry.  Co.  194,  201 

East   Norway   Lake    Church   v. 

Froislie  256 

Eaton  v.  Walker  255,  264,  265 

Eden  v.  Ridsdale's  Ry.  Lamp  & 

Lighting  Co.  83 

Edgington  y.  Fitzmaurice       132,  139 
Edwards  v.  Grand  Junction  Ry. 

Co.  200 

Eichbaum  v.  Irons  226 

Eley  v.  Positive  Assurance  Co.     194, 

219 
Elizabethtown  Gas  Co.  v.  Green 

250 

Ellis  v.  Andrews  133 

Ely  v.  Hanford  46.  62 

Emery  v.  Parrott  59,  76,  124 

Emly  v.  Lye  207 

Emma  Silver  Mining  Co.  v.  Grant 

32,  69,  79 

v.  Lewis  1, 10,  11,  32,  70 

Empire  Mills  v.  Allston  Grocery 

Co.  263,  264,  265 

Empress  Engineering  Co.,  In  re   194, 

199,  215,  216,  221,  222 

Ennis  Cotton  Oil  Co.  v.  Burks      225, 

231 

Erie  City  Iron  Works  v.  Barber   144, 

170 


XX11 


TABLE    OF   CASES. 
[References  are  to  Sections.] 


Erlanger  ?>.  New  Sombrero  Phos- 
phate Co.      1,  5,  17,  21,  25,  27,  28, 
38,  42,  46,  62,  95,  100,  101,  154 
Eschweiler  v.  Stowell  107 

Essex  Bridge  Co.  v.  Tuttle  211 

Evenson  v.  Ellingson  255 

Excelsior  Pebble  Phosphate  Co. 

v.  Brown  107 

Exchange  Bank  of  Kentucky  v. 

Gaitskill  159 

Ex-Mission  Land  &  Water  Co.  v. 
Flash  1,  8,  46,  53 


FAIRBANKS'  Executors  v.  Hum- 
phreys 230 
Fairchild  v.  McMahon  134 
Farlow  v.  Ellis                                  100 
Farmers'  Co-operative  Trust  Co. 

v.  Floyd  225 

Farmers'  Loan  &  Trust  Co.  v. 

New  York  &  Northern  Ry.  Co.   110 
Farmers'  Stock  Breeding  Ass'n 

v.  Scott  144 

Farnham  v.  Benedict  257 

Farrar  v.  Walker  188,  193 

Farwell  v.  Great  Western  Tele- 
graph Co.  107 
Faure  Electric  Accumulator  Co., 

In  re  80 

Fawcett  v.  Charles  107 

v.  Whitehouse  123 

Fay  v.  Noble  264,  265 

Fear  v.  Bartlett  193 

Felgate's  Case  173 

Ferris  v.  Thaw  250,  265 

Field  v.  Cooks  250 

Finch  v.  Ullman  252 

Finnegan   v.   Knights   of  Labor 

Building  Ass'n  253,  254,  256 

First  Nat.  Bank  v.  Almy  265 

First  Nat.  Bank  of  Ft.  Scott  v. 

Drake  117 

Fish  v.  Cleland  138 

Fisher  v.  Worrall  137 

Fitzroy  Bessemer  Steel  Co.,  In  re 

38,  83,  87 

Flagler  Engraving  Co.  v.  Flagler  156 
Flemming  v.  Weagley  188 

Fogg  v.  Griffin  170 

Ford  v.  McComb  144 

Forrester  v.  Bell  233 

Foss  v.  Harbottle  105,  109,  114 

Foster  v.  Mansfield  R.  R.  Co.         101 
v.  Seymour  39 

Fountain     Spring  Park   Co.   v. 

Roberts  59,  76 

Frankfort  v.  S.  T.  Co.  210 

Franklin  Fire  Ins.  Co.  v.  Hart    194, 

223 


Fredenhall  v.  Taylor 
Fritts  v.  Palmer 
Frost  v.  Belmont 
Fuller  v.  Rowe 


238 
250 
222 
265 


GALIGHER  v.  Jones  83 

Gamble  v.  Queen's  County  Water 

Co.  115 

Garnett  v.  Richardson  250,  265 

Gartside  Coal  Co.  v.  Maxwell        253 
Garwood  v.  Ede  163 

Gay  v.  Alter  102 

Gent  v.   Manufacturers'  Mutual 

Ins.  Co.  194,  202 

George  Newman  &  Co.,  In  re          41 
Gerhard  v.  Bates  141 

Getty  v.  Devlin  46,  125,  128 

Gilmore  v.  Bradford  230 

Glassier  v.  Rolls  143 

Gold  Co.,  In  re  39,  156 

Gooday  v.  Colchester,  &c.  Ry.  Co. 

197 
Goodin  v.  Cincinnati  &  Whitewater 

Canal  Co.  62 

Goodrich  v.  Reynolds  185 

Goodwin  v.  Home  132 

v.  Mass.  Loan  &  Trust  Co.      184 
Gordon  v.  Parmelee  133 

Cover's  Case     17,  19,  42,  54,  55,  154, 

183 

Gower  v.  Andrew  42 

Graham  v.  Nowlan  144 

Grand  Rapids  Safety  Deposit  Co. 

v.  Cincinnati  Safe  &  Lock  Co.      92 
Grand  River  Bridge  Co.  v.  Rollins 

202,  210 

Grand  Trunk  Ry.  Co.  v.  Brodie    162, 

168 

Granger's  Ins.  Co-  v.  Turner          174 
Grant  v.  Law  103 

Grape  Sugar  &  Vinegar  Mfg.  Co. 

*>.  Small  212 

Grappengeisser  v.  Lake  184 

Gray   v.  Suspension  Car  Truck 

Mfg.  Co. 

v.  Lewis  107 

Great  Luxembourg  Co.  v.  Mag- 
nay  62,  100 
Great  Wheal  Polgooth  Co.,  In  re  3 
Green  v.  Barrett  168 
Greene  v.  People  250 
Greenhalgh  v.  Manchester,  &c. 

Ry.  Co.  200 

Greenly  v.  Hopkins  82 

Gregory  v.  Patchett  121 

Guckert  v.  Hacke  250,  264,  265 

Gunn   v.   London  &  Lancashire 

Ins.  Co.  199,  215 


TABLE    OF   CASES. 
[References  are  to  Sections.] 


XX111 


HAAS  v.  Bank  of  Commerce  256 

Haase  v.  Mitchell  102 

Haight  v.  Hayt  155 

Hall  ».  Grand  all  225,  228,  230 

v.  Johnson  139 

v.  Vt.  &  Mass.  R.  R.  Co.  222, 224 

Hambly  v.  Trott  89 

Hamilton  c.  Clarion  R.  R.  Co.        252 

v.  Granger's  Ins.  Co.          174, 192 

Hammett  v.  Emerson  144 

Harrington  v.   Victoria  Graving 

Dock  Co.  75 

Harris  v.  McGregor  250 

Haskell  v.  Worthington  193 

Hussletnan  r.  U.  S.  Mortgage  Co. 

256 

Hatchard  v.  Mege  89 

Hatcher  v.  Hall  101 

Hause  v.  Hamenheimer  263 

Haven  v.  Foster  138 

Havens  v.  Hoyt  115 

Hawes  v.  Oakland  107 

Hawk  v.  Brownell  242 

Hay's  Case  78 

Hayes  v.  Stanley  166 

Hazard  v.  Durant  117 

Heath  v.  Erie  Ry.  Co.  107 

Hedden  v.  Griffin  139 

Henninger  v.  Heald  99,  187 

Hereford  Engineering  Co.,  In  re    199 
Hereford  South   Wales  Wagon 

Co.,  In  re  221,222 

Hersey  v.  Tully  225 

v.  Veazie  107 

Hess  Mfg.  Co.,  In  re  46 

Heymann   v.   European  Central 

Ry.  Co.  181,  188 

Hicliens  v.  Congreve  65 

Higgins  v.  Crouse  137 

v.  Hopkins  226 

v.  Lansingh  39,  46,  62,  103 

v.  Senior  225,  228 

Hill  v.  Beach  257 

v.  Hobart  188 

v.  Nisbett  115 

Hirslifield  v.  London,  Brighton  & 

South  Coast  Ry.  Co.  138 

Holbrook  v.  Burt  188 

v.  Connor  133,  134,  137 

Holdom  v.  Ayer  144 

Holmes  v.  Higgins  233 

Home's  Appeal  186 

Hornblower  v.  Crandall          157,  233 
Houghton  v.  Butler  89 

Houldsworth  v.  City  of  Glasgow 

Bank  170,  172 

Houston  v.  R.  R.  Co.  170 

Hovenden  v.  Lord  Annesley  84 

Howard  v.  Patent  Ivory  Mfg.  Co. 

216 


Howard  v.  Turner  192 

v.  Yunker  225 

Hubbard  v.  Weare  143 

Hubbell  v.  Meigs  159 

Hudson  v.  Green  Hill  Seminary  256 
Hudson  Real  Estate  Co.  v.  Tower  211 
Hughes  v.  Antietam  Mfg.  Co.  137 
Humphrey  v.  Merriam  144 

Humphreys  v.  Mooney  265 

Hungerford  Nat.  Bank  v.  Van 

Nostrand  264 

Hunt  v.  Silk  102 

Huntington  &  Broad  Top  Ry.  & 

Coal  Co.  v.  English  83 

Huron  Printing  &  Binding  Co.  v. 

Kittleson  202,  210 

Hurst  v.  Salisbury  228,  250 

Button  v.  Thompson  233 

v.  Uphill  233 


IMPERIAL  Mercantile  Credit  Ass'n 
v.  Coleman  30,  34,  35,  54 

Indianapolis,  Peru  &  Chicago  Ry. 
Co.  v.  Tyng  144 

Insurance  Co.  v.  Harbor  Protec- 
tion Co.  265 

Ives  v.  Carter  134 


JACKSON  v.  Stockbridge  144 

Jaggar  v.  Winslow  '138 

Jefts  v.  York  230 

Jenkins  v.  Pye  101 

Jennings  v.  Broughton  155 

Jersey  City  Gas  Co.  v.  Dwight      257 
Jessop  v.  Ivory  189 

Jessup  v.  Carnegie  258 

Jewell  v.  Rock  River  Paper  Co.  .  192 
Jewett  v.  Davis  187 

Johnson  v.  Corsner  235,  265 

v.  Goslett  162,  166 

v.  Smith  225,  228,  230 

Johnston  v.  Gumbel  264 

Jones  v.  Aspen  Hardware  Co.         263 
v.  Harrison  163 

v.  Johnson  105 

17.  Smith  101 

Jordan  v.  Money  132 


KAISER  v.  Lawrence  Savings  Bank 

250 
Kankakee  &  Seneca  R.  R.  Co.  v. 

Horan  260 

Karberg's  Case  139, 171, 173, 174, 184 
Keener  v.  Harrod  230 

Kelner  v.  Baxter      194,  199,  215,  220, 

228 


XXIV 


Kennedy  v.  McKay 

v.  Panama  Mail  Co. 
v.  Thorp 

Kenner  v.  Harding 

Kilgore  v.  Bruce 

Kilpatrick  v.  Reeves 

Kimber  v.  Barber 

King  v.  Barnes 
v.  Eagle  Mills 


TABLE   OF   CASES. 
[References  are  to  Sections.] 


171 
185 
100 
147 
135 
144 
61 
247 
185 


o.  Sioux  City  Loan  &  Inv.  Co. 

134 

Kingston  Cotton  Mills  Co.,  Re         91 
Koop  v.  Bohmrich  107 

Kost  v.  Bender  134 

Kountze  v.  Kennedy        143,  144,  184 


LADYWELL  Mining  Co.  v.  Brooks 

10,  17,  18,  '28,  42,  46,48,  61,  62,  74 
Lagrone  v.  Timmerman  230 

Lake  v.  Argyll  234 

Lake  Ontario  Shore  R.  R.  Co.  v. 

Curtis  211 

Lamning  v.  Galusha  256 

Landis  v.  Sea  Isle  City  Hotel  Co. 

107 

Landman  v.  Entwistle  226,  227 

Lands  Allotment  Co.  v.  Broad         92 
Larned  v.  Beal  253 

Law  v.  Grant  173 

Learing  v.  Wise  188 

Lefray  v.  Gore  243 

Lehman  v.  Warner  252 

Le  Lievre  v.  Gould  143 

Lewis  v,  Tilton  230 

Lindsay  Petroleum  Co.  v.  Hurd 

99,  101,  135,  190 
Long  v.  Citizens'  Bank  194,  196 

i).  Woodman  132 

Lord  v.  Copper  Miners  Co.      105, 109 

v.  Essex  Building  Ass'n  250 

Lord  Burns'  Case  107 

Lorillard  v.  Clyde  194 

Loverin  v.  McLaughlin  265 

Low  v.  Bouviere  143 

v.  Conn.  &  Passumpsic  R.R. 

Co.  224 

Lucas  v.  Beach  233 

Lydney  &  Wigpool  Iron  Ore  Co. 

v.  Bird         1,  2,  4,  15,  21,  32,  67,  80 
Lynde    v.    Anglo-Italian    Hemp 
Spinning  Co.  173 


MACDOUGALL  v.  Gardiner  109 

Mackall  v.  Chesapeake  Canal  Co. 

252 

Mackay  v.  Bank  of  New  Bruns- 
wick 170 
Maddick  v.  Marshall                        238 


Mahan  v.  Wood  211 

Maitland's  Case  166 

Manahan  v.  Noyes  102 

Mann    v.    Edinburgh    Northern 

Tramways  Co.  41 

Manning  v.  Albee  134 

Manufacturers'  Nat.  Bank  v.  Perry 

82 

March  v.  Eastern  R,  R.  Co.  107 

Marchand  v.  Loan  &  Pledge  Ass'n 

222 

Marriner  v.  Dennison  187 

Marsh  v.  Falker  144 

Marten  v.  Paul  0.  Burns  Wine 

Co.  189 

Mason  v.  Harris  107,  112,  118 

v.  Waite  82 

Matthews  v.  Bliss  147 

Mayor,  &c.  of  Salford  v.  Lever 

76,92 

McAIeer  v.  Horsey  134,  139 

r.  McMurray  156 

McArthur  v.  Times  Printing  Co. 

199,  202,  203,  210,  214 
McClellan  v.  Scott  155 

McClinch  v.  Sturgis  252 

McCully  ?>.  Pittsburgh  &  Connells- 

ville  R.  R.  Co.  189 

McCurdy  »:.  Rogers  225,  230 

McElheney's  Appeal  32,  71 

McFadden  v.  Robinson  134 

McGrew   v.    City   Produce    Ex- 
change 259 
McKay's  Case  83 
McKeon  v.  Boudard,  Peveril  Gear 

Co.  183 

McKnight  v.  Pittsburgh  205 

McTighe  v.  Macon  Construction 

Co.  255,  256 

Mead  v.  Bunn  155 

Medbury  v.  Watson  134 

Medenhall,  In  re  255 

Medill  v.  Collier  257,  265 

Meeker  v.  Winthrop  Iron  Co.        110 
Melhado   v.   Port  Allegre,   New 

Hamburg  &  Brazilian  Ry.  Co.  194, 
199,  215,  219,  220 
Menier  v.    Hooper's   Telegraph 

Works  107,  117 

Merchants'  Bank  v.  Stone  264 

Merchants'   &  Planters'  Line  v. 

Wagoner  107 

Merriman  v.  Magiveny  256 

Methodist,  &c.  Church  v.  Pickett 

256 

Metropolitan  Bank  v.  Heiron     84,  85 
Metropolitan  Coal  Consumers  Ass'n 

v.  Scrim  geour  80 

Meyer  v.  Staten  Island  Ry.  Co. 

110 


TABLE    OF   CASES. 
[References  are  to  Sections.] 


XXV 


Michener  v.  Payson  192 

Miller  K.  Barber  148 

v.  Murray  107 

v.  Wild  Cat  Gravel  Road  Co. 

171,  211 

Ming  v.  Woolfolk  155 

Mitchell  !'.  Zimmerman 
Mohler  v.  Carder  184 

Mokelumne   Hill   Mining  Co.  v. 

Woodbury  249,  250 

Montgomery  v.  Forbes    250,  257,  264 
Montreal   River  Lumber  Co.  v. 

Milhils  144 

Moore  v.  Explosives  Co.  139 

v.  Silver  Valley  Mining  Co.   107 

Moore  &  Handley  Hardware  Co.  v. 

Tower's  Hardware  Co.  194 

Morehouse  v.  Yeager  157 

Moreland  v.  Atchison  138 

Morgan  v.  McKee  188 

v.  Skiddy  140,  141 

v.  Thetford  100 

Moriarty  v.  Stafferan  102 

Morse  v.  Hutchins  159 

v.  Shaw  139 

Morton  v.  Hamilton  College  222 

Moseley  v.  Cressey's  Co.  167 

Mozley  v.  Alston  107,  109 

Munson  v.  Syracuse,  &c.  Ry.  Co.  194 


NANT-Y-GLO  &  Blainalron  Works 

Co.  v.  Grave  13,  83,  91 

Nash  v.  Minnesota  Title  Ins.  & 

Trust  Co.  133,  140,  144,  170 

National  Debenture  &  Assets  Co., 

In  re  250,  251 

Neall  v.  Hill  107 

Neblett  v.  Macfarland  101,  102 

Nebraska  Nat.  Bank  of  York  v. 

Ferguson  264 

Newbiggin  v.  Adam  184 

New  Brunswick  &  Canada  Ry. 

Co.  v.  Muggeridge  176 

New  Sombrero  Phosphate  Co.  v. 

Erlanger  21,  30,  54,  89 

Newton  v.  Belcher  233,  239 

v.  Blunt  241 

v.  Liddiard  239 

Newton  Nat.  Bank  v.  Newbiggen  193 

New  York  Nat.  Exchange  Bank 

v.  Crowell  264,  265 

New  York  &  New  Haven  R.  R. 

Co.  v.  Ketchum  223 

Nockels  v.  Crosby  162,  163,  166 

Norbury's  Case  238 

Norris  v.  Cottle  233,  235 

North  v.  Phillips  83 

v.  State  262 


North  Australian  Territory  Co., 
In  re  78 

Northumberland  Hotel  Co.,  In  re 

194,  199,  215 

North  West  Transportation  Co. 
v.  Beatty  115 


OAKES  v.  Cattaraugus  Water  Co.  212 

v.  Turquand      148,  188,  191,  251 

Ogilvie  v.  Knox  192 

Ohio  v.  Bryce  107 


PADDOCK  v.  Fletcher  129 

v.  Franklin  Ins.  Co.  217 

Page  v.  McMillan  188 

v.  Parker  144,  157 

Panama  &  South  Pacific  Tel.  Co. 
v.  India  Rubber,  Gutta  Percha 
&  Tel.  Works  Co.  99 

Pape  v.  Capital  Bank  256 

Parker  v.  Moulton  133,  134 

v.  Nickerson  42,  61 

Parkin  v.  Fry  245 

Parmelee  v.  Adolphe  185 

Parsons  v.  Hayes  39 

v.  McKinley  188 

Pasley  v.  Freemaa  155 

Patrick  v.  Reynolds  235 

Patterson  v.  Arnold  257 

v.  Lippencott  230 

Paxton  v.  Bacon  Mill,  &c.  Co.        194 
Paxton  Cattle  Co.  v.  First  Nat. 

Bank  of  Arrapahoe  213 

Payson  r.  Withers  138 

Peabody  v.  Flint  107,  121 

Pearson's  Case  64,  78,  83,  238 

Pease  v.  Gloaheck  101 

Peebles  v.  Patasco  Guano  Co.        170 
Peek's  Case  188 

Peek  v.  Derry  161,  184 

v.  Gurney    89,  130,  140,  148,  150, 
179,  187 

Peel's  Case  251 

Peninsular  R.  R.  Co.  v.  Duncan  211 
Penn  Match  Co.  v.  Hapgood  194, 
195,  202,  214,  215 
Penn.  Mutual  Life  Ins.  Co.  v. 

Crane  139 

Penobscot  R.  R.  Co.  v.  Dummer  211 
People  v.  Central  Pacific  R.  R. 

Co.  138 

v.  Cheeseman  249 

v.  Higgins  107 

v.  La  Rue  252 

v.  Montecito  Water  Co.   250,  256 
v.  Stockton  &  Visalia  R.  R. 
Co.  249 


XXVI 


TABLE    OF   CASES. 
[References  are  to  Sections.] 


Perley  v.  Balch  102,  188 

Perrine  u.  Grand  Lodge  261 

Perry  v.  Little  Rock  &  W.  S.  R.R. 

Co.  221 

Petre   v.    Eastern    Counties  Ry. 

Co.  200 

Pettis  v.  Atkins  254 

Philadelphia,  Wilmington  &  Balti- 
more R.  R.  Co.  v.  Co  well  189 
Phillips  v.  Homfray  89 
Pliinizy  v.  Augusta  &  K.  R.  Co.     262 
Phosphate  Sewage  Co.  v.  Hart- 

mont  64,  77,  97,  102 

Pinto  Silver  Mining  Co.,  In  re       101 
Pittsburg  Mining  Co.  v.  Spooner 

57,  262 
Pittsburg  &  Tenn.  Copper  Co.  v. 

Quintrell  202,  210 

Planters'  &  Miners'  Bank  v.  Pad- 
gett 264 
Plaquemines  Tropical  Fruit  Co. 

v.  Buck  19,  22,  26,  64,  56 

Pratt  v.  Oshkosh  Match  Co.      199, 

202,  204 

Presby  v.  Parker  171 

Preston  v.  Liverpool,  &c.  Ry.  Co. 

200,  201 

Price  v.  Mulford  84 

Priest  v.  White  156 

Pulsford  v.  Richards  181 


QUEEN  City  Furniture  &  Carpet 
Co.  v.  Crawford  199,  202,  231 


RAGAN  v.  McElroy  263 

Railroad  Gazette  v.  Wherry  235 

Ramsey  v.  Thompson  Mfg.  Co.      192 
Ramskill  r.  Edwards  89 

Rand  v.  Webber  103 

Randell  v.  Taimen  225 

Rathbone  v.  Parkersburg  Gas  Co. 

107 

Rawson  v.  Harzan  144 

Redding  v.  Godwin  161 

Redgrave  v.  Hurd  184,  186 

Reeder  v.  Maranda  192 

Reese  River  Silver  Mining  Co.  v. 

Smith  191 

Reichwald  v.  Commercial  Hotel 

Co.  205 

Rennie  v.  Clark  226 

Reynell  v.  Lewis  233,  235,  238 

v.  Sprye  146 

Rice  v.  Nat.  Bank  of  Common- 
wealth 251 
Richlieu  Hotel  Co.  v.  International 
Military  Encampment  Co.          211 


Rickhoff  v.  Brown's  Sewing  Ma- 
chine Co.  252,  263 
Riley  v.  Packington  238 
Roberts,  Ex  parte  235 
Roberts  Mfg.  Co.  v.  Schlick  238 
Robertson  v.  Parks  144 
Robinson  ;>.  Smith  105,  107 
Rockford,  Rock  Island  &  St.  Louis 

R.  R.  Co.  v.  Sage  223 

Rogers  v.  Danby  Universalist  So- 
ciety 249 
v.  New  York  &  Texas  Land 

Co.  202,  210,  212 

Roseman  v.  Canovan  147 

Rotherham  Alum  &  Chemical  Co., 

In  re  218,  219,  221 

Royal  Bank  of  Liverpool  v.  Grand 

Junction  R.  R.  101 

Russell  v.  Wakefield  Waterworks 

Co.  107 

Rutherford  v.  Hill  233,  235 


SALEM  Mill  Dam  Co.  v.  Ropes  185 
Salem  Rubber  Co.  v.  Adams  155 

Salford,  Mayor,  &c.  of,  v.  Lever  76, 92 
Salomon  v.  Salomon  &  Co.  27,  39 
Samuel  v.  Holladay  105 

Sandy  River  R.  R.  Co.  v.  Stubbs  44 
Sanford  v.  Handy  174 

Sanger  v.  Upton  192,  211 

v.  Wood  100 

Saunders  v.  Farmer  252 

Savage  v.  Bartlett  192,  193 

Schiffer  v.  Dietz  100 

Schloss  v.  Trade  Co.  252,  263 

Schramm  v.  O'Connor  133 

Schreyer  v.  Turner  Flouring  Mills 

Co.  202, 210 

Schwabocker  v.  Biddle  139 

Scott  v.  Dixon  141 

v.  Ebury  215, 218,  229 

Scottish  Northeastern  Ry.  Co.  v. 

Stewart  201 

Scottish  Petroleum  Co.,  In  re  188,  191 
Seacord  v.  Pendleton  265 

Searcy  v.  Yarnell  263 

Seymour  v.  Spring  Forest  Ceme- 
tery Ass'n  39 
Shanks  v.  Whitney                          133 
Shaw  v.  Davis                                 115 
Sheffield  Nickel  Co.  v.  Unwin         103 
Sherman  v.  White                       78,  81 
Shields  v.  Clifton  Land  &  Improve- 
ment Co.                                       265 
Shoe  &  Leather  Nat.  Bank  v.  Dix 

226 

Short  v.  Stevenson  123 

Simons  v.  Vulcan  Oil  Co.     38,  52,  53 


TABLE   OF   CASES. 
[References  are  to  Sections.] 


XXV11 


Skegnors  v.  St.  Leonards  Tram- 
way Co.  218 
Smith  v.  Bolles  161 
«>.  Brittenham  102 
v.  Chadwick                       136,  155 
v.  Duffy                                      160 
i;.  Kurd                                     105 
v.  Newton  144 
17.  Sorby  99 
v.  Standard  Laundry  Machine 

Co.  259 

v.  Warden  265 

Snider's  Sons'  Co.  17.  Troy     252,  253, 

256,  264 

Snow  v.  Alley  102 

v.  Boston  Blank  Book  Mfg. 

Co.  121 

Snyder  v.  Studebaker  263 

Society  of  Perun  v.  Cleveland        256 
Society  of  Practical  Knowledge 

i7.  Abbott  41 

Sollund  i7.  Johnson  144 

Solomon  17.  Penoyer  225 

Somers  v.  Richards  134 

South  Joplin  Land  Co.  v.  Case 

15,  42,  54 

Spahr  v.  Farmers'  Bank  263 

Speidel  v.  Henrici  84 

Spiller  v.  Paris  Skating  Rink         199 
Spottiswoode's  Case  243 

Sproat  v.  Porter  233,  235 

Stafford  Nat.  Bank  v.  Palmer        265 
Stanisby  v.  Fraser  Metallic  Life 

Boat  Co.  199 

Stanley  v.  Chester  &  Birkenhead 

Ry.  Co.  200 

Stanton  v.  New  York  &  Eastern 

R.  R.  Co.  205,  212 

Starrett  v.  Rockland  Ins.  Co.         211 
State  v.  Central  Ohio  Mut.  Relief 

Ass'n  249 

v.  Critchett  255 

v.  Jefferson  Turnpike  Co.        188 
v.  Trustees  Vincennes  Uni- 
versity 107 
Stetson  v.  Patten  225 
Stevenson  v.  Newnham  101 
Stewart's  Case  189 
Stewart  v.  Stearns  134 
v.  St.   Louis   &   Fort    Scott 

R.  R.  Co.  40 

Stewart  Paper  Mfg.  Co.  v.  Rau     261 
Stiles  v.  White  157 

St.  John's  Mfg.  Co.  v.  Munger       173 
St.  Louis  &  Fort  Scott  R.  R.  Co. 

17.  Tiernan  9,  40 

Stofflett  v.  Strome  263 

Stone  v.  Denny  144 

Stout  v.  Zulick  253,  256,  264 

Stowe  17.  Flagg  223 


Stumpf  v.  Stumpf 

Suessenguth  v.  Bingenheimer        133 
Sullivan  v.  Mitcalfe  154 

Supreme  Court  Independent  Or- 
der Foresters  of  Canada  v. 
Supreme  Court  United  Order 
Foresters  252, 256 

Swimm  v.  Bush  186 

Swisshelni  v.  Swissvale  Laundry 

Co.  202,  210 

Syracuse,  Cheuango  &  New  York 
R.  R.  Co.,  In  re  119 


TAITE'S  Case  188 

Tamplin's  Case  187 

Tarbell  v.  Page  252 

Tarkinson  v.  Purvis  100 

Taylor  v.  Leith  144 

Teachout  v.  Van  Hoesen 
Teague  v.  Irwin  139 

Ten  Eyck  v.  Pontiac,  Oxford  & 

Port  Austin  R.  R.  Co.  261 

Tennent  v.  City  of  Glasgow  Bank  191 
Terwilliger  v.  Murphy  225 

Thompson  17.  First  Nat.  Bank  of 

Toledo  240 

v.  People  249 

v.  Phoenix  Ins.  Co.  138 

Tift  v.  Quaker  City  Nat.  Bank  222 
Tilson  v.  Warwick  Gaslight  Co.  194 
Totten  v.  Burhans  144 

Tuckaseegee  Mining  Co.  v.  Good- 
hue  263 
Turner  v.  Davies  241 
v.   Grangers'  Life  &  Health 

Ins.  Co.  192 

Tuscaloosa  Mfg.  Co.  v.  Cox  107 

Twin  Lick  Oil  Co.  v.  Marbury       101 
Twy cross  v.  Grant    1,  14,  20,  89,  150, 
153,  154,  160,  161,  181 
Tyler  v.  Savage  147 

Tyrrell  v.  Bank  of  London  3,  43 


UNION  Nat.  Bank  P.  Hunt  133 

Union  Pacific  Ry.  Co.  v.  Barnes    144 
Unity  Ins.  Co.  v.  Cram  250 

Upton  ?;.  Englehart          138,  192,  193 
v.  Tribilock  138,  188,  192 


VANE  v.  Cobbold  163 

Van  Epps  v.  Harrison  134 

Vanneman  v.  Young  253,  256 
Vawter  v.  Ohio,  &c.  R.  R.  Co.        133 

Veazey  v.  Doten  133 

Vigers  v.  Pike  100 

Vredenburg  v.  Behan  255 


xx  vm 


TABLE    OF   CASES. 
[References  are  to  Sections.] 


WALKER  v.  Mobile  &  Ohio  R.  R. 

Co.  165 

Wallace  t>.  Lincoln  Savings  Bank  107 
Walsham  v.  Stainton  89,  157 

Walstab  v.  Spottiswoode  162,  166 
Walton  v.  Oliver  250 

Ward  v.  Brigham  233,  235,  265 

v.  Lord  Lodensborough  162 

Warner  v.  Benjamin  139,  159 

v.  Seymour  155 

Warren  v.  Para  Rubber  Shoe  Co.  89 
Watson  v.  Earl  of  Charlemont  164 
Watt's  Appeal  121 

Weare  v.  Gove  225 

Weatherford  Mineral  Wells  & 

Northwestern  Ry.  Co.  v.  Gran- 
ger 199,  202,  224 
Webster  v.  Upton  192 
Wechselberg  v.  Flour  City  Nat. 

Bank  235 

Weir  v.  Barnett  157 

Weiseger  v.  Richmond  Ice  Co.  189 
West  London  Commercial  Bank 

v.  Kitson  138 

West  Point  Foundry  Ass'n  v. 

Brown  163 

Western  Screw  &  Mfg.  Co.  v. 

Cowsley  194, 223 

Westmoreland  Green  &  Blue  Slate 

Co.,  In  re  32,  37,  50,  73 

Whalev  Bridge  Calico  Printing 

Co.  v.  Green  1,  32,  50,  75,  92 

Wheeler  v.  Pullman  Iron  &  Steel 

•Co.  107 

White  v.  Madison  225 

Whitney  v.  Robinson  263 

v.  Wyman        212,  225,  252,  253 


Wicker  sham  v.  Lee  86 

Wilcox  v.  Iowa  Wesleyan  Uni- 
versity 184 
Wilkinson's  Case  188 
Willey  v.  Parrott                             163 
Williams  v.  McFaddon  144 
v.  Montgomery  248 
v.  Page                              168,  169 
v.  Salmond  168 
Williamson  v.  New  Jersey  South- 
ern R.  R.  Co.  100 
Willoughby  v.  Chicago  Junction 

Railway  122 

Wilson  v.  Curzon  245 

v.  West  Hartlepool  R'y  Co.  216 
Windram  v.  French  138,  155,  156 
Wingettr.  Quincy  Building  Ass'n  263 
Winsor  v.  Bailey  122 

Winters  v.  Hub  Mining  Co.  215 

Wise  v.  Fuller  133 

W.  Laxon  Co.  No.  2  251 

Wontner  v.  Sharp  189 

Wood  v.  Argyll  233,  234 

v.  Cory  Waterworks  Co.  119 
Woodbury  Heights  Land  Co.  v. 

Lodenslager  16,  54,  65 

Worth,  Ex  parte  173 

Wright  v.  Bank  of  the  Metropolis    83 
Wylde  v.  Hopkins  233,  235 


YALE  Gas  Stove  Co  v.  Wilcox    22, 

32,  74,  75 

Yeates  v.  Hines  184 

v.  Prior 
Young  v.  Alhambra  Mining  Co.    107 


THE  LAW  OF  PROMOTERS 


AND    THE 


PROMOTION  OF  CORPORATIONS. 


CHAPTER  I. 

NATURE  OF    PROMOTERSHIP  AND    RELATION   OP   PROMOTERS  TO 
THE   CORPORATION. 


§  1.    Explanation    of    term    "  pro- 
moter." 

2.  Term  not   applicable  to  one 

acting  as  an  agent  only. 

3.  In  re  The  Great  Wheal  Pol- 

gooth  Co.,  53  L.  J.  Ch.  42. 

4.  One  who  is  an  agent  may  be  a 

promoter  also. 

5.  Agent  may  be  promoter,   al- 

though compensation    does 
not  come  from  corporation. 

6.  Central  Land  Co.  v.  Obenchain, 

92  Va.  130. 

7.  Tests    to    ascertain  who    are 

promoters. 

8.  Ex-Mission  Land  &  Water  Co. 

v.  Flash,  97  Cal.  610. 

9.  St.  Louis  &  Fort  Scott  R.  R.  Co. 

v.  Tiernan,  37  Kan.  606. 

10.  Question  of  fact  whether  one 

is  a  promoter. 

11.  Emma    Silver    Mining  Co.  v. 

Lewis,  4  C.  P.  D.  396. 

12.  Bagnally.  CarIton,6Ch.D.371. 

13.  Nant-y-Glo    &    Blaina   Co.   v. 

Grave,  12  Ch.  D.  738. 


§  14.    Twycross  v.  Grant,  2  C.  P.  D. 
469. 

15.  Lydney  &  Wigpool  Iron  Ore 

Co.  v.  Bird,  33  Ch.  D.  85. 

16.  Mere  intent  or  agreement  to 

promote  does  not  make  one 
a  promoter. 

17.  Absolute    purchase    of    pro- 

perty with  view  to  resale 
to  projected  corporation  as 
evidence  of  promotership. 

18.  Ladywell     Mining     Co.     v. 

Brooks,  35  Ch.  D.  400. 

19.  Conditional  purchase  of  pro- 

perty with  view  to  resale  to 
projected  corporation  as  evi- 
dence of  promotership. 

20.  Promotership  not  limited  to 

period  anterior  to  organiza- 
tion of  corporation. 

21.  Fiduciary    relation    of    pro- 

moters to  corporation. 

22.  Existence  of  such  relation  es- 

tablished by  authorities. 

23.  Consequences  of  fiduciary  re- 

lationship. 


§  1.    Explanation  of  term  "promoter."  —  The  law  imposes 
serious  responsibilities  upon  persons  who  become  promoters 

1 


2  PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

of  corporations,  holding  them  to  a  high  standard  of  con- 
duct, and  subjecting  to  careful  scrutiny  their  dealings  with 
the  corporation  which  they  promote.  It  is  accordingly 
important  to  inquire  what  constitutes  one  a  promoter  of  a 
corporation.  The  first  requirement  would  seem  to  be  a 
definition.  But  it  has  become  apparent  that  it  is  not  prac- 
ticable precisely  to  define  the  term  "  promoter  "  as  used  in 
connection  with  corporations.  It  is  ambiguous,  and  it  is 
necessary  to  ascertain  in  each  case  what  the  so-called  pro- 
moter did,  before  his  legal  liabilities  can  be  accurately 
ascertained.1  Therefore,  what  is  really  to  be  looked  to 
is  not  a  word  or  a  name,  but  the  acts  and  relations  of  the 
parties.2  The  term,  however,  is  one  of  accepted  use3  com- 
monly employed  to  designate  persons  who  take  some  part 
in  procuring  the  formation  of  a  corporation,  or  in  inducing 
others  to  join  it,  and  who  in  so  doing  assume  such  a 
position  that  a  relation  of  a  fiduciary  nature  between 
themselves  and  the  corporation  is  created.4 

1  Lindley,  L.  J.,  in  Lydney  $•  Wigpool  Iron  Ore  Co.  v.  Bird,  33  Ch. 
D.  85. 

2  Bowen,  L.  J.,  in  Whaley  Bridge  Calico  Printing  Co.  v.  Green,  5 
Q.  B.  D.  109. 

8  "  It  is  a  term  not  of  law,  but  of  business."  Bowen,  L.  J.,  in 
Whaley  Bridge  Calico  Printing  Co.  v.  Green,  5  Q.  B.  D.  109. 

4  The  following  explanations  of  the  term  may  be  found  in  the 
cases : — 

"  The  term  '  promoter '  involves  the  idea  of  exertion  for  the  pur- 
pose of  getting  up  and  starting  a  company  (or  what  is  called  '  float- 
ing '  it),  and  also  the  idea  of  some  duty  towards  the  company 
imposed  by  or  arising  from  the  position  which  the  so-called  promoter 
assumes  toward  it."  —  Lindley,  J.,  in  Emma  Silver  Mining  Co.  v. 
Lewis,  4  C.  P.  D.  at  p.  407. 

"  A  promoter,  I  apprehend,  is  one  who  undertakes  to  form  a  com- 
pany with  reference  to  a  given  project,  and  to  set  it  going,  and  who 
takes  the  necessary  steps  to  accomplish  the  purpose."  —  Cockburn, 
Ch.  J.,  in  Twycross  v.  Grant,  2  C.  P.  D.  at  p.  541. 

"  A  short  and  convenient  way  of  designating  those  who  set  in 
motion  the  machinery  by  which  the  Act  enables  them  to  create  an 


NATURE   OF   PROMOTEKSHIP.  3 

§  2.  Term  not  applicable  to  one  acting  as  agent  only. — • 
The  term  is  not  applicable  to  persons  who  do  not  put 
themselves  in  a  fiduciary  position  toward  the  corporation, 
but  act  merely  as  agents  of  those  who  are  forming  or 
floating  it.  Thus,  printers,  advertising  agents,  and  law- 
yers, employed  by  the  projectors  of  a  company  to  render 
the  usual  trade  or  professional  services  incident  to  its 
incorporation,  or  necessary  to  set  it  going,  are  not  pro- 
moters. In  one  sense  their  acts  tend  to  promote  the 
company,  but  not  in  such  a  sense  as  to  establish  any 
relation  between  it  and  them.1 

§  3.  Illustrative  case.  —  In  the  case  of  In  re  Great  Wheal 
Polgooth  Co.?  one  of  the  promoters  of  a  company  sold  to 
it,  for  £300,000,  property  which  he  had  but  a  short  time 
prior  thereto  purchased  for  .£10,000.  The  solicitor  acted 
as  such  in  the  incorporation  of  the  company,  and  in  the 
transfer  of  the  property  to  it.  Prospectuses  of  the  com- 
pany were  handed  to  and  distributed  by  him ;  and  on 
a  certain  occasion  when  attacks  upon  the  company  had 

incorporated  company."  —  Lord  Blackburn,  in  Erlanger  v.  New  Som- 
brero Phosphate  Co.,  3  App.   Gas.  at  p.  1268. 

"  The  term  '  promoter '  is  a  term  not  of  law,  but  of  business,  use- 
fully summing  up,  in  a  single  word,  a  number  of  business  operations 
familiar  to  the  commercial  world,  by  which  a  company  is  generally . 
brought  into  existence."  —  Bowen,  L.  J.,  in  Whaley  Bridge  Calico 
Printing  Co.  v.  Green,  5  Q.  B.  D.  109. 

In  Bosher  v.  Richmond  ty  Harrisonburg  Land  Co.,  89  Va.  455,  and  Ex- 
Mission  Land  and  Water  Co.  v.  Flash,  97  Cal.  610,  the  following  defini- 
tion from  Cook  on  Stockholders,  sect.  651,  was  adopted:  "  A  promoter 
is  a  person  who  brings  about  the  incorporation  and  organization  of  a 
corporation.  He  brings  together  the  persons  who  become  interested  in 
the  enterprise,  aids  in  procuring  subscriptions,  and  sets  in  motion  the 
machinery  which  leads  to  the  formation  of  the  corporation  itself." 

1  "  No  doubt  a  very  little  will  make  people  promoters  of  a  com- 
pany, if  it  can  be  seen  that  they  were  really  doing  something  for  their 
own  interests,  and  not  acting  merely  as  agents  for  others."  —  Pearson, 
J.,  in  Lydney  &  Wigpool  Iron  Ore  Co.  v.  Bird,  31  Ch.  D.  at  p.  339. 

2  53  L.  J.  Ch.  42. 


4     PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

been  made  in  a  newspaper,  lie  prepared  an  answer  which 
he  caused  to  be  inserted  in  several  newspapers.  He  had 
no  interest  in  the  company  except  the  right  to  be  paid 
for  his  labor.  It  was  held  that  he  was  not  a  promoter. 
"  The  duty  which  the  solicitor  bears  to  the  company  has," 
said  the  vice-chancellor,  "  nothing  to  do  with  promotion." 
As  to  the  sale  of  property  to  the  company,  the  vice- 
chancellor  observed  :  "  But  what  had  the  solicitor  to  do 
with  that?  He  did  not  manage  the  company.  He  was 
not  to  advise  them  that  it  was  not  worth  the  money  they 
were  going  to  pay  for  it."  And  as  to  the  matter  of  the 
prospectus,  he  observed :  "  Persons  applying  for  pros- 
pectuses would  apply  where  they  could  get  them,  and 
if  they  applied  to  him  it  was  his  business  as  the  solicitor 
of  the  company,  not  as  a  promoter,  that  he  should  have 
the  prospectuses  to  give  them." 1 

§  4.  One  who  is  an  agent  may  be  a  promoter  also.  —  But 
persons  who  act  as  agents  for  the  projectors  of  a  corpora- 
tion may  nevertheless  become  promoters,  if  they  engage 
in  work  of  promotion.  This  is  well  brought  out  in  the 
case  of  Lydney  $•  Wigpool  Iron  Ore  Co.  v.  Bird.  At 
the  trial2  it  appeared  that  the  owners  of  some  mines 
employed  James  Bird  to  form  and  launch  a  company  for 
the  purpose  of  purchasing  the  mines.  Bird  undertook 
all  the  business  connected  with  the  issuing  of  the  pros- 
pectuses and  the  bringing  out  of  the  company.  It  was 
agreed  between  him  and  the  owners,  by  an  agreement  not 
disclosed,  that  he  should  be  paid  a  commission  of  £10,800 
out  of  the  purchase  money  of  <£100,000,  which  was  to  be 
given  by  the  company  for  the  mines  ;  and  this  payment 
was  made  after  the  formation  of  the  company.  An  action 

1  For  circumstances  under  which  a  solicitor  became  a  promoter, 
see  Tyrrell  v.  Bank  of  London,  10  H.  L.  C.  26. 

2  31  Ch.  D.  328. 


NATURE   OF   PROMOTERSHIP.  5 

was  subsequently  brought  by  the  company  against  Bird 
to  recover  the  commission  retained  by  him.  He  alleged 
that  all  which  he  did,  he  did  simply  as  an  agent  for  the 
vendors  ;  that  the  commission  which  he  received  was  in 
payment  for  services  rendered  by  him  as  agent  to  the 
vendors.  On  the  other  hand,  it  was  contended  that  he 
was  himself  interested  in  the  company,  besides  being 
the  agent  of  the  vendors ;  that  the  company  was  as  much 
his  company  as  the  company  of  the  vendors ;  and  that 
he  was  a  promoter.  The  decision  of  the  Court  was  made 
to  turn  on  the  question  whether  the  purchase  price  to  be 
given  by  the  proposed  company  for  the  mines  was  pur- 
posely raised  or  "loaded,"  so  that  Bird's  commission  of 
£10,800  was  paid  out  of  the  money  of  the  company,  and 
not  out  of  money  which  under  any  circumstances  would 
have  gone  to  the  vendors,  or  whether  the  purchase  price 
of  £100,000  was  in  good  faith  agreed  to  be  paid  without 
any  regard  to  the  sum  which  was  to  be  paid  Bird.  On 
the  evidence,  the  Court  found  that  Bird's  commission 
was  to  be  paid  by  the  vendors  out  of  the  purchase  money 
which  they  were  to  receive  from  the  company ;  that  the 
company  was  not  to  pay  any  portion  of  it ;  and  that 
accordingly  Bird  was  acting  merely  as  an  agent,  and 
not  as  a  promoter.  But  the  Court  of  Appeal1  took  a 
different  view  of  the  evidence,  holding  that  although  an 
agent  of  the  vendors  to  get  up  the  company,  he  was  acting 
not  in  their  interest  but  in  his  own  by  causing  the  pur- 
chase price  of  the  mines  to  be  swollen,  so  that  he  might 
covertly  take  his  commission  from  the  coffers  of  the 
company  ;  and  that,  although  in  getting  up  the  company 
he  was  acting  for  the  vendors,  that  did  not  absolve 
him  from  obligation  to  the  company  attached  to  the 
position  which  he  assumed  tow'ard  it.  He  was  the  agent 
i  33  Ch.  D.  85. 


6     PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

of  the  vendors,  but  he  was  also  the  promoter  of  the 
company. 

§  5.  Agent  may  be  promoter,  although  compensation  does 
not  come  from  corporation.  —  The  fact  that  the  commission 
or  compensation  of  an  agent  employed  to  form  a  corpo- 
ration does  not  come,  directly  or  indirectly,  from  the 
corporation,  is  not  conclusive  that  he  is  an  agent  only. 
Notwithstanding  this  fact,  he  may  be  a  promoter  also ; 
as,  for  example,  if  he  brings  the  corporation  into  exist- 
ence and  controls  its  organization,  in  order  that  it  may 
purchase  property  or  make  some  contract  in  which  his 
principal  has  an  interest.  He  then  enters  into  a  fiduciary 
relation  with  the  corporation,  and  is  responsible  to  it  for 
wrong-doing  in  that  relation,  although  committed  by  him 
for  other  people.1  The  distinction  is  apparent  between 
such  a  case  as  this  and  the  case  of  the  broker,  the  printer, 
or  the  lawyer,  who  act  strictly  as  such,  and  are  mere 
agents,  no  relation  being  established  between  them  and 
the  corporation. 

§  6.  Illustrative  case. — In  Central  Land  Co.  v.  Obenchain? 
Obenchain  and  Joliffe  brought  an  action  against  the  corpo- 
ration to  recover  $500.  Their  claim  was,  that  as  agents  of 
one  Felix  they  had  sold  to  the  corporation  a  tract  of  land 
for  the  sum  of  $10,000 ;  that  Felix  had  agreed  to  pay  them 
a  commission  of  five  per  cent  for  their  services  in  effecting 
this  sale;  that  the  corporation  paid  Felix  $10,000,  the 
purchase  price  of  the  land,  but  afterwards  collected  from 
him  the  commission  of  $500,  which  was  due  them.  It  was 
contended  by  the  corporation  that  when  Obenchain  and 
Joliffe  became  the  agents  of  Felix,  they  were  engaged  in 
promoting  the  organization  of  the  corporation,  and  in 
securing  control  of  the  land  of  Felix  and  of  other  lands  to 

1  Erlanger  v.  New  Sombrero  Phosphate  Co.,  3  App.  Cas.  1218. 
*  92  Va.  130. 


NATURE   OF   PROMOTERSHIP.  7 

be  purchased  by  the  corporation  when  organized  ;  that  for 
these  services  they  had  been  paid  by  the  corporation  under 
an  agreement,  referred  to  in  the  prospectus,  providing  for 
payment  by  the  corporation  to  the  promoters  for  their  ser- 
vices ;  and  that  the  corporation  was  entitled  to  collect  and 
retain  the  commission  in  question,  as  a  commission  which 
Felix  had  without  its  knowledge  agreed  to  pay  to  Oben- 
chain  and  Joliffe  for  services  in  a  transaction  in  which  they 
were  acting  not  alone  as  his  agent,  but  also  as  promoters 
of  the  corporation.  At  the  trial,  the  corporation  requested 
the  Court  to  instruct  the  jury  that  if  they  believed  that 
Obenchain  and  Joliffe  were  instrumental  in  the  organiza- 
tion or  creation  of  the  corporation,  and  secured  the  option 
from  Felix  for  the  purpose  of  aiding  in  the  organization  of 
a  company  for  the  purchase  of  the  land  from  Felix,  and 
that  the  corporation  was  subsequently  organized  by  their 
efforts,  with  the  assistance  of  others,  then  Obenchain  and 
Joliffe  were  promoters  of  the  corporation,  and  were  not  en- 
titled to  make  a  profit  on  the  sale  of  the  Felix  land  to  the 
corporation,  without  its  knowledge  and  consent.  The  Court 
refused  to  give  this  instruction.  On  appeal,  it  was  held 
that  the  refusal  to  give  the  instruction  as  requested  was 
error. 

§  7.  Tests  to  ascertain  who  are  promoters.  —  It  has  been 
said  that  in  seeking  to  ascertain  who  are  the  promoters 
of  a  company  it  is  useful  to  ask,  "  Who  started  the  idea  of 
forming  a  company  for  the  purpose  in  question  ?  "  "  Who 
settled  what  was  to  be  included  in  the  preliminary  papers, 
or  gave  the  lawyers  instructions  to  prepare  them,  and  in- 
formation upon  which  they  might  be  prepared  ?  "  "  Who 
undertook  the  liability  for  the  expense  incident  to  the  pre- 
liminaries of  incorporation?"  And,  lastly,  the  question, 
"  Cui  bono  ?  "  —  "  Who  benefited  by  the  formation  of  the 
company  ?"  But  none  of  these  questions  is  decisive,  for  a 


8  PROMOTERS  AND  PROMOTION   OF  CORPORATIONS. 

man  may  have  done  one  or  more  of  these  things  as  a  mere 
agent,  and  not  as  a  promoter  at  all ;  and  on  the  other 
hand,  a  man  may  have  kept  in  the  background  and  have 
appeared  to  do  none  of  these  things,  and  yet  be  a  promoter. 
Frequently  the  vendors  of  a  company  are  the  promoters  of 
the  company ;  but  the  owners  of  property  may  have  been 
asked,  "  If  a  company  is  formed  to  acquire  your  property, 
will  you  sell  it  ?  and  if  so,  at  what  price  ? "  If  they  have 
done  no  more  than  agree  to  sell,  they  will  not  be  pro- 
moters. It  is  to  be  noted,  however,  that  the  Court  will 
look  at  the  substance  of  the  transaction,  and  vendors  or 
others  who  are  in  reality  the  promoters  will  not  escape 
liability  by  the  interposition  of  a  nominal  vendor  or  a  nom- 
inal promoter  .who  professes  to  purchase  and  re-sell,  or  to 
undertake  the  financial  operations  incident  to  forming  and 
floating  a  company.1 

§  8.  Illustrative  case.  —  In  Ex-Mission  Land  $  Water  Co. 
v.  Flash?  the  facts  were  substantially  as  follows :  At  a 
judicial  public  sale  of  4,500  acres  of  land  belonging  to  the 
estate  of  one  Olivera,  the  defendants  became  the  purchasers 
at  the  price  of  $22,725,  or  $5.05  per  acre.  They  paid  down 
ten  per  cent,  the  required  cash  payment ;  the  balance  was 
to  be  paid  in  a  fixed  time,  the  deed  to  be  delivered  when 
this  deferred  payment  was  made.  They  then  employed 
Wilson  and  Coleman  as  their  agents  to  effect  a  sale  of  the 
lands  at  $25  per  acre,  or  1112,500.  In  case  of  such  sale, 
the  defendants  were  to  pay  the  agents  a  commission  of 
$5.00  per  acre,  or  $22,500,  payable  partly  in  notes  of  a  cor- 
poration to  be  formed  to  purchase  the  lands.  The  agents 
induced  subscriptions  for  stock  in  the  intended  corporation, 

1  Jordan  &  Browne  on  Joint  Stock  Companies,  62.     The  writer  has 
stated  the  matter  in  the  above  paragraph,  substantially  in  the  lan- 
guage employed  in  the  work  cited. 

2  97  Cal.  610. 


NATURE   OF  PROMOTERSHIP.  9 

by  representations  that  the  defendants  held  a  contract  for 
the  purchase  of  the  lands  in  question  from  the  estate  of 
Olivera,  at  the  price  of  $25  per  acre,  which  was  the  lowest 
price  at  which  the  land  could  be  purchased,  and  that  the 
subscribers  for  shares  would  "  get  in  on  the  ground  floor 
at  bed-rock  prices."  The  facts  that  the  defendants  had 
already  bought  the  lands  for  $5.05  per  acre,  that  Wilson 
and  Coleman  were  their  agents,  and  were  to  receive  from 
them  a  commission  of  $22,500,  if  the  sale  to  the  corpora- 
tion was  brought  about,  were  not  disclosed.  The  corpo- 
ration was  formed  under  the  promotion  of  the  agents. 
The  sum  of  $37,500,  which  was  paid  in  on  subscriptions  for 
stock,  before  and  after  the  incorporation,  was  turned  over 
to  the  defendants.  From  this  sum  the  payment  due  under 
the  judicial  sale  of  the  lands  was  made  to  the  Olivera 
estate,  and  a  deed  was  obtained,  the  title  being  taken  in  the 
name  of  one  of  the  defendants.  A  conveyance  was  then 
made  to  a  trustee  for  the  corporation,  which  executed  its 
notes  for  $75,000,  secured  by  a  mortgage  of  the  lands.  In 
this  way  the  defendants  received  the  purchase  price  agreed 
upon,  $112,500.  In  a  suit  subsequently  brought  to  obtain 
relief  for  the  corporation  from  the  fraud  practised  upon  it, 
it  became  material  to  determine  whether  the  defendants 
were  promoters  of  the  corporation.  They  contended,  that 
while  Wilson  and  Coleman,  who  had  promoted  the  corpo- 
ration, were  their  agents  to  bring  about  a  sale  of  the  lands, 
they  were  not  their  agents  to  promote  the  corporation,  and 
had  no  authority  from  them  to  promote  it ;  and  it  was  not 
shown,  they  contended,  that  they  themselves  had  done  any- 
thing in  the  way  of  promotion.  But  the  Court  held,  on  all 
the  facts,  that  they  had  employed  the  agents  to  act  as  pro- 
moters, and  that  in  effect  they  had  promoted  the  corpora- 
tion through  their  agents.  If  Wilson  and  Coleman  had,  of 
their  own  motion  and  on  their  own  account,  determined  to 


10    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

form  a  corporation,  and  had  gone  to  the  defendants  and 
obtained  an  agreement  from  them  to  sell  to  the  corpora- 
tion, when  formed,  for  $25  per  acre,  and  to  pay  a  commis- 
sion of  $5.00  an  acre  on  the  sale,  the  defendants,  if  they  had 
stopped  there,  would  not  have  been  promoters.  But  the 
defendants  themselves  formulated  a  scheme  to  bring  a 
corporation  into  existence  to  buy  their  lands,  and  they  em- 
ployed agents  to  form  the  corporation,  to  procure  subscrip- 
tions for  its  stock,  and  to  bring  about  the  purchase  of  the 
lands  by  it.  They  were  the  real  promoters  of  the  corpora- 
tion, although  keeping  under  cover  as  promoters,  and 
appearing  openly  only  as  vendors. 

§  9.  In  St.  Louis  &  Fort  Scott  R.  R.  Co.  v.  Tiernan,1  —  Tier- 
nan  and  Ayers,  as  two  of  the  incorporators  of  the  plaintiff 
corporation,  signed  and  acknowledged  the  charter,  January 
20,  1880.  They  purchased  a  certain  road-bed,  February 
17, 1880.  The  charter  was  filed  and  the  corporation  came 
into  existence  February  23, 1880,  Tiernan  and  Ayers  being 
among  the  first  directors.  In  May,  1880,  Tiernan  and 
Ayers  sold  the  road-bed"  to  the  corporation  at  a  very 
great  advance  over  its  cost  to  them.  It  was  plain  from 
the  facts  found,  that  they  bought  the  road-bed  with  intent 
to  sell  it  to  the  corporation,  when  formed.  On  the  ground 
that  their  position  and  interest  were  fully  disclosed  to 
all  the  shareholders  in  the  corporation  at  the  time  of  the 
transaction,  the  Court  properly  held  that  subsequent  share- 
holders, at  a  later  period,  could  not  compel  Tiernan  to 
account  to  the  corporation  for  his  profit.  But  the  Court 
also  held  that  Tiernan  was  not  a  promoter,  inasmuch  as 
it  did  not  appear  that  he  had  "  advised  or  suggested  the 
organization  of  the  corporation."  Obviously,  this  is  not 
the  exclusive  test,  as  the  Court  apparently  took  it  to  be ; 
and  it  seems  clear  that  in  holding  that  Tiernan  was  not  a 
1  37  Kan.  606. 


NATURE   OF  PROMOTEKSHIP.  11 

promoter,  the  Court  was  in  error.  "  The  word  '  promoter,' " 
said  Simpson,  J.,  "  had  its  origin  in  the  methods  by  which 
joint  stock  companies  were  formed  in  England,  where  by 
law  they  were  declared  partnerships."  Describing  then 
the  methods  by  which  railroad  corporations  were  formed  in 
England  by  special  act  of  Parliament,  he  observed :  "  This 
has  no  resemblance  to  our  method  of  organizing  corpora- 
tions. It  is  true  that  the  word  has  been  found  to  have  its 
uses  in  our  jurisprudence,  but  in  a  much  more  restricted 
sense  than  that  used  in  the  English  reports."  The 
learned  judge  apparently  overlooked  the  fact  that  most  of 
the  corporations  in  England  are  formed  under  a  general 
law,  as  they  are  in  this  country,  and  that  it  is  only  the  un- 
limited liability  corporations  that  are  regarded  as  partner- 
ships. With  the  exception  of  certain  statutory  liabilities 
which  exist  in  England,  the  position  of  a  promoter  is  sub- 
stantially the  same  in  our  law  as  in  the  law  of  England, 
and  the  word  "  promoter  "  is  not  used  in  any  different  sense 
here  than  there. 

§  10.  Promotership  a  question  of  fact.  —  It  is  a  question 
of  fact  whether  a  person  is  or  is  not  a  promoter,  and  it 
may  be  left  to  the  jury  to  determine.1  The  following 
cases  are  selected  to  illustrate  more  fully  the  nature  of 
promotership. 

§  11.  Emma  Silver  Mining  Co.  v.  Lewis.  —  A  firm  of  metal 
brokers  who  were  selling  ore  of  the  Emma  Silver  Mine 
in  America,  on  a  commission  of  two  and  one-half  per 
cent.,  arranged  with  Park,  one  of  the  owners  of  the  mine, 
to  assist  in  its  sale  to  a  company  to  be  formed  by  him  in 
England  to  purchase  it.  He  was  to  secure  their  employment 
as  metal  brokers  of  the  projected  company  at  the  usual 
rate  of  English  commission,  one  per  cent.,  and  he  prom- 

1  Emma  Silver  Mining  Co.  v.  Lewis,  4  C.  P.  D.  396;  Ladywell 
Mining  Co.  v.  Brooks,  35  Ch.  D.  400. 


.  \    .  i 
12          PROMOTEKS   AND   PROMOTION   OF  CORPORATIONS. 

ised  to  pay  them  £ 5,000  for  their  assistance,  and  to 
compensate  them  for  the  reduction  in  their  commission. 
They  were,  as  he  knew,  acquainted  with  facts  detrimen- 
tal to  the  reputation  of  the  mine,  and  his  real  motive 
in  promising  payment  of  the  large  sum  stated  was  to 
insure  their  silence  respecting  such  facts.  He  procured 
the  formation  of  a  company,  and  the  purchase  by  it  of 
the  mine  at  a  price  paid  partly  in  cash  and  partly  in 
paid-up  shares.  They  assisted  him  in  the  sale  of  the 
mine,  and  permitted  themselves  to  be  named  in  the  com- 
pany's prospectus  as  ready  to  answer  any  inquiries  in 
relation  to  the  mine,  and  answered  such  inquiries,  but 
were  silent  in  respect  to  the  detrimental  facts  known  to 
them.  They  were  appointed  metal  brokers  of  the  com- 
pany at  the  one  per  cent,  commission,. and  were  secretly 
paid  the  sum  promised  them  by  a  transfer  of  two  hundred 
and  fifty  paid-up  shares  out  of  those  received  from  the 
company  in  payment  of  the  purchase  price  of  the  mine. 
It  was  held  that  they  were  promoters.  As  the  Court 
observed,  "  They  left  Park  to  get  up  the  company,  upon 
the  understanding  that  they  as  well  as  he  were  to  profit 
by  the  operation;  they  were  behind  him;  they  were  in 
the  position  of  undisclosed  joint  adventurers.  But  they 
not  only  left  Park  to  do  the  best  he  could  for  them  as 
well  as  himself;  they  also  assisted  him.  Moreover,  by 
the  acceptance  of  the  reference  to  them  in  the  company's 
prospectus,  they  undertook  the  duty  of  assisting  to  float  the 
company  by  answering  the  inquiries  of  persons  proposing 
to  take  shares  in  it."  l 

§  12.  Bagnali  v.  Cariton.  —  R.  S.  Bagnall,  J.  Nayler,  and 
W.  S.  Nayler  were  trustees  under  the  will  of  James 
Bagnall,  and  by  the  terms  of  the  will  were  directed  to 
sell  a  colliery  and  iron  works  belonging  to  his  estate. 

1  Emma  Silver  Mining  Co.  v.  Lewis,  4  C.  P.  D.  396. 


NATUKE   OF   PKOMOTERSHIP.  13 

Richard  Bagnall,  who  was  tenant  for  life  of  the  property 
under  the  will,  promised  Duignan,  solicitor  for  the  trus- 
tees, XI, 500  as  commission  if  he  should  find  a  purchaser 
for  the  property.  Duignau  applied  to  the  Messrs.  Rich- 
ardson, and  was  by  them  introduced  to  Carlton.  An 
arrangement  was  made  between  Duignan,  on  behalf  of 
the  trustees,  and  Carlton,  that  Carlton  should  form  a 
company  to  purchase  the  collieries  and  business  for 
£290,370.  If  Carlton  performed  his  part  of  the  agree- 
ment, he  was  to  be  paid  £85,000  by  the  vendors;  if  he 
failed,  he  was  to  pay  £20,000  as  liquidated  damages, 
and  this  sum  was  first  to  be  deposited  as  caution  money. 
About  this  time  Carlton  applied  to  Grant  to  join  him  in 
the  enterprise,  and  it  was  agreed  between  Grant,  Carlton, 
and  the  Richardsons,  that  Grant  should  undertake  the 
whole  risk  and  expense  of  getting  up  the  company,  and 
should  advance  Carlton  the  deposit  of  £20,000;  and  that 
as  compensation  for  his  services  he  should  receive  £65,000 
and  Carlton  £20,000,  out  of  which  the  latter  was  to 
pay  the  Richardsons  £10,000.  This  arrangement  between 
Grant,  Carlton,  and  the  Richardsons  was  not  disclosed 
to  the  trustees  or  to  Duignan,  who,  on  the  face  of  the 
transactions,  dealt  with  Carlton  and  the  Richardsons.  A 
contract  was  then  executed  between  the  trustees,  who 
agreed  to  sell  the  property,  and  Bytheny,  as  a  trustee 
on  behalf  of  the  intended  company,  who  agreed  to  buy, 
for  the  sum  of  £290,370.  At  the  same  time  a  secret 
contract  was  made  between  the  trustees  and  Carlton, 
whereby  it  was  agreed  that  Carlton  should  be  paid 
£85,000  from  the  purchase  price  when  received.  The  com- 
pany was  then  registered.  The  object  of  the  company  was 
stated  to  be,  among  other  things,  the  carrying  into  effect 
the  purchase  agreement  between  the  trustees  and  Bytheny. 
As  soon  as  the  company  was  established,  Grant  circulated 


14  PROMOTERS  AND   PROMOTION   OF  CORPORATIONS. 

the  prospectus  and  advertised  and  recommended  the  com- 
pany. The  shares  were  taken  by  the  public,  and  the 
company  took  possession  and  paid  the  purchase  price  of 
the  property.  Out  of  this  price  Carlton  was  paid  £85,000 
by  the  trustees,  and  this  sum  was  divided  between  the 
Richardsons,  Grant,  and  Carlton,  as  had  been  agreed  upon, 
and  Duignan  was  paid  £1,500  by  Richard  Bagnall.  It  was 
held  that  the  trustees,  Grant,  the  Richardsons,  Duignan, 
and  Carlton  were  promoters.1 

§  13.  Nant-y-Glo  &  Blaina  Iron  "Works  Co.  v.  Grave.  — 
Richardson  and  Carlton  were  promoters  of  the  Nant-y-Glo 
and  Blaina  Iron  "Works  Company,  and  received  certain 
paid-up  shares  as  a  secret  commission  on  a  sale  of  prop- 
erty to  the  company.  Being  promoters  of  the  company, 
they  cast  about  to  find  other  promoters,  and  a  letter  was 
addressed  by  Mr.  Richardson  to  the  defendant,  Mr.  Grave, 
in  which  he  explained  to  him  that  operation  which  he 
then  desired  to  effect  for  the  promotion  of  the  company, 
and  suggested  the  desirability  of  having  for  directors  per- 
sons whose  names  would  be  likely  to  inspire  confidence 
in  the  public,  and  asked  him  to  become  a  director.  Mr. 
Grave  agreed  to  become  a  director,  in  consideration, 
among  other  things,  of  receiving  fifty  of  the  shares  which 
had  been  retained  by  Richardson  and  Carlton.  "  I  do 
not  think  it  would  be  forcing  the  law  of  this  case  in  the 
slightest  degree,"  said  Bacon,  Y.  C.,  "  to  say,  that  from 
the  time  that  letter  was  received  and  adopted  and  acted 
on,  Mr.  Grave  became  as  much  a  promoter  of  this  company 
as  any  other  person  engaged  in  it."  2 

§  14.  Twycross  v.  Grant.  —  The  Duke  de  Saldanha,  a 
Portuguese  nobleman,  ambassador  to  England,  had  a  con- 
cession of  powers  to  make  and  work  tramways  from 

1  Bagnall  v.  Carlton,  6  Ch.  D.  371. 

2  Nant-y-Glo  &  Blaina  Co.  v.  Grace,  12  Ch.  D.  738. 


NATUKE   OF   PROMOTERSHIP.  15 

Lisbon  to  other  places.  Desiring  to  sell  this  concession, 
he  applied  to  the  defendant,  Grant,  as  a  person  who  would 
assist  him.  Grant  applied  to  the  other  defendants,  Clark 
and  Punchard,  contractors  and  persons  whose  business  it 
was  to  make  such  tramways.  The  arrangements,  among 
others  settled,  were  as  follows :  that  a  corporation  should 
be  formed  ;  that  Clark  and  Punchard  should  contract  with 
it  to  construct  and  equip  certain  lines  of  tramway  for  the 
sum  of  & 309,810.  Of  this  sum  Clark  and  Punchard  were 
to  give  the  Duke  £22,000  in  money  and  shares,  Grant 
£ 45,800  for  services  in  obtaining  the  contract  for  them 
and  in  the  formation  of  the  company  and  raising  the 
capital ;  and  Clark  and  Punchard  were  also  to  qualify 
the  directors,  that  is  to  say,  to  transfer  to  them  or  give 
them  the  price  of  shares,  free  of  expense,  to  such  an 
amount  as  to  qualify  them  to  be  directors.  The  corpo- 
ration was  formed,  and  its  capital  raised  ;  directors  were 
found,  mainly,  if  not  wholly,  by  Clark  and  Punchard ;  and 
the  contract  for  the  construction  of  the  tramways  was 
made  by  the  corporation  with  Clark  and  Punchard.  Grant 
and  Clark  and  Punchard,  in  a  suit  subsequently  brought 
against  them  by  subscribers  for  shares,  were  held  to  be 
promoters.  "  That  the  defendants  were  promoters  of  the 
company  from  the  beginning,"  said  Cockburn,  Ch.  J., 
"  can  admit  of  no  doubt.  They  framed  the  scheme ; 
they  not  only  provisionally  formed  the  company,  but 
were,  in  fact,  to  the  end  its  creators ;  they  found  the 
directors  and  qualified  them  ;  they  prepared  the  pros- 
pectus ;  they  paid  for  printing  and  advertising,  and  the 
expenses  incidental  to  bringing  the  undertaking  before 
the  world."1 

§  15.    Lydney  &  Wigpool  Iron  Ore  Co.  v.  Bird.  —  James 
Bird,  a  member  of  a  firm  of  iron   merchants   consisting 

1  Twycross  v.  Grant,  2  C.  P.  D.  469. 


16  PROMOTERS  AND   PROMOTION   OF   CORPORATIONS. 

of  himself  and  his  brother  William  Bird,  entered  into 
an  agreement,  in  behalf  of  the  firm,  with  the  owners  of 
certain  iron  mines  to  form  and  launch  a  company  for 
the  purpose  of  purchasing  the  mines.  It  was  agreed 
that  they  should  receive  a  commission  of  £  10, 800  out  of 
the  purchase  price  of  X  100,000  which  was  to  be  paid 
by  the  company  for  the  mines,  and  should  have  the  con- 
duct of  the  sale  of  the  company's  ore  on  a  two  per  cent, 
commission.  All  the  negotiations  were  conducted  by 
James  Bird,  and  William  Bird  took  no  part  in  them. 
The  latter,  however,  personally  guaranteed  the  subscrip- 
tion of  the  capital  stock  of  the  proposed  corporation. 
"  James  Bird,"  the  Court  found,  "  in  fact  procured  the 
formation  of  the  company.  He  suggested  its  formation, 
he  took  an  active  part  in  the  preparation  of  its  prospectus 
and  memorandum  and  articles  of  association,  in  the  ap- 
pointment of  two  of  its  first  directors,  in  the  appointment 
of  its  secretary,  and  he  procured  his  own  firm  to  be 
engaged  to  conduct  the  sales  of  the  company  at  a  large 
commission.  He  fixed  the  purchase  price  at  .£100,000, 
and  stipulated  for  the  payment  of  XI 0,800  to  his  own 
firm,  and  he  procured  the  payment  of  that  sum  by  the 
company,  of  which  he  retained  £5,800,  paying  £5,000  to 
William  Bird  for  his  guarantee."  It  was  held  that  he 
was  a  promoter.  William  Bird,  it  was  held,  was  not  a 
promoter,  there  being  no  evidence  that  he  had  taken 
any  such  part  in  the  formation  of  the  company  as  to  make 
him  accountable  to  it  as  a  promoter.  It  did  not  appear 
that  he  knew  of  the  arrangement  as  to  the  £10,800,  or 
that  he  was  in  effect  to  be  paid  by  the  company  for  his 
guarantee.  He  had  retired  from  the  firm  on  the  day  that 
the  company  was  registered,  and  the  promotion  of  com- 
panies was  no  part  of  the  business  of  the  firm  when  he 
was  a  member  of  it.  He  therefore  escaped  liability,  al- 


NATURE   OF   PROMOTERSHIP.  17 

though  he  had  received  £  5,000  at  the  expense  of  the 
company.1 

§  16.  Mere  agreement  or  intent  to  promote  does  not  make 
one  a  promoter.  —  It  may  be  important  to  determine  when 
a  promoter  becomes  or  ceases  to  be  such.  For  example, 
the  liability  of  a  promoter  to  account  to  the  corporation 
for  a  profit  secured  by  him  on  a  sale  of  his  property  to 
the  corporation,  may  depend  upon  whether  he  acquired 
the  property  before  or  after  he  became  a  promoter.  A 
person  becomes  a  promoter  only  by  taking,  directly  or 
indirectly,  in  the  formation  or  floating  of  a  corporation, 
some  action  of  such  a  nature  as  to  impose  on  him  the 
duty  of  protecting  the  interests  of  the  corporation  about 
to  be  formed,  so  far  as  such  interests  may  be  actually  or 
constructively  in  his  keeping.2  Accordingly  an  intention, 
or  even  an  agreement,  to  promote  is  not  enough. 

§  17.  Absolute  purchase  of  property  with  view  to  resale 
to  projected  corporation  as  evidence  of  promotership.  —  The 
mere  purchase  of  property  outright,  with  intent  to  sell 
the  same  to  a  corporation  to  be  called  into  existence  to 
buy  it,  does  not  constitute  the  purchaser  a  promoter  of  a 
corporation  which  may  subsequently  be  formed  and  to 
which  the  property  is  sold.  The  utmost  that  can  be  said 

1  Lydney  Sf  Wigpool  Iron  Ore  Co.  v.  Bird,  33  Ch.  D.  85.     See  also 
South  Joplin  Land  Co.  v.  Case,  104  Mo.  572 ;   Woodbury  Heights  Land 
Co.  v.  Loudenslager  (N.  J.  1896),  35  At.  Rep.  436. 

2  "  Something  must,  it  is  submitted,  be  done  by  the  promoter  to 
impose  upon  him  the  duty  of  protecting  the  interest  of  those  who 
ultimately  form  the  company.     He  assumes  this  duty  if  he  assumes 
to  act  for  them,  or  if  he  induces  them  to  trust  him,  or  to  trust  persons 
who  are  under  his  control,  and  who  are  practically  himself,  in  dis- 
guise ;  he  also  assumes  this  duty  if  he  calls  the  company  into  exist- 
ence in  order  that  it  may  buy  what  he  has  to  sell ;  but  he  does  not 
assume  such  duty  by  negotiating  with  persons  who  have  themselves 
assumed  that  duty,  and  who  are  in  no  way  under  his  influence."  — 
2  Lindley  on  Partnership,  585. 

2 


18  PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

of  him  is  that  at  the  time  of  his  purchase  he  was  the 
projector  of  a  corporation  which  he  intended  to  promote. 
He  may  or  may  not  become  a  promoter  of  the  corporation. 
He  may  advertise  the  fact  that  he  has  acquired  the  prop- 
erty, and  is  willing  to  sell  it  to  any  corporation  that 
chooses  to  buy  it  of  him  ;  then  if  any  persons  see  fit  to 
promote  a  corporation  to  make  the  purchase,  they  are 
promoters,  but  he  is  no  promoter.1  On  the  other  hand, 
he  may  take  such  steps  in  the  organization  of  a  corpora- 
tion for  the  purchase  of  his  property,  as  to  become  a 
promoter.  But  it  is  by  taking  such  steps,  and  not  by  the 
purchase,  that  he  assumes  the  character  of  a  promoter.2 

§  18.  Illustrative  case.  —  111  Ladywell  Mining  Co.  v. 
Brooks?  the  following  facts  appeared :  — 

On  the  1st  of  February,  1873,  five  persons  purchased 
a  mine  for  £5,000,  with  the  view  of  reselling  it  to  a  com- 
pany to  be  formed,  but  they  had  at  that  time  taken  no 
steps  to  form  any  company.  They  completed  their  pur- 
chase on  the  17th  of  March,  1873,  the  purchase  price 
being  paid  out  of  their  own  moneys ;  and  on  the  4th  of 
April,  1873,  they  entered  into  a  provisional  contract  with 
a  trustee  for  the  intended  company  for  the  sale  of  the 
mine  to  the  company  for  £  18,000.  On  the  8th  of  April, 
1873,  the  company  was  registered  under  the  Companies 
Acts,  its  principal  object  being,  as  stated  in  the  memo- 
randum of  association,  the  purchase  of  the  mine;  and 
in  its  articles  the  contract  of  the  4th  of  April,  1873, 
was  adopted  and  four  of  the  vendors  were  named  as 
directors ;  but  the  contract  of  the  1st  of  February,  1873, 

1  Bacon,  V.  C.,  in  Gover's  Case,  20  Eq.  122. 

2  Gover's  Case,  1  Ch.  D.  182 ;  Erlanger  v.  New  Sombrero  Phosphate 
Co.,  per  Lord  Cairns,  3  App.  Cas.  at  p.  1235;  Ladywell  Mining  Co. 
v.  Brooks,  35  Ch.  D.  400. 

8  35  Ch.  D.  400. 


NATURE   OF   PROMOTERSHIP.  19 

was  not  disclosed  to  the  company.  The  whole  of  the 
shares  were  placed  by  the  vendors,  and  the  share  capital 
(.£30,000)  paid  in  in  cash.  At  the  same  time  they  re- 
ceived £18,000  from  the  company  as  the  purchase  money 
for  the  mine.  Subsequently  a  suit  was  brought  by  the 
company  to  recover  the  secret  profit  made  by  them  on 
their  sale  to  the  company.  It  was  held  that  the  vendors, 
when  they  purchased  the  mine,  were  not  promoters  of, 
or  in  a  fiduciary  position  towards,  the  company  which 
was  ultimately  formed. 

§  19.  Conditional  purchase  of  property  with  view  to  resale 
to  projected  corporation  as  evidence  of  promotership.  —  The 
acquirement  of  an  option  to  buy  property  with  intent  to 
sell  the  property  to  a  corporation  to  be  formed,  and  to 
fulfil  the  condition  of  the  option  by  means  of  the  money 
or  shares  of  stock  received  on  the  sale  to  the  corporation, 
does  not  in  itself  constitute  the  holder  a  promoter  of  a 
company  subsequently  formed,  and  to  which  the  property 
is  sold.  And  this  is  so  even  if  the  intent  of  the  holder 
is  to  avail  himself  of  his  option  only  in  the  event  of  a 
company  being  formed  and  capitalized  to  purchase  the 
property.  The  fact  that  he  pays  or  agrees  to  pay  his 
vendor  in  shares  of  the  company's  stock,  is  a  circum- 
stance to  be  considered  in  determining  whether  or  not 
the  purchase  was  made  for  the  company,  but  it  is  not 
conclusive.  He  may  sell  to  the  company  and  take  his 
pay  in  stock,  without  becoming  a  promoter  of  the  com- 
pany ;  and  this  being  so,  he  may  properly  agree  to  pay 
his  vendor  in  such  stock.  There  is  no  distinction  in 
principle  between  the  absolute  title  acquired  in  the  case 
of  a  purchase  outright,  and  the  conditional  right  acquired 
under  an  option.1  But  in  either  case,  a  corporation  pro- 

1  G over's  Case,  1  Ch.  D.  182 ;  Plaquemines  Tropical  Fruit  Co.  v. 
Buck,  52  N.  J.  Eq.  219. 


20  PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

moted  by  the  purchaser,  and  to  which  the  property  is 
sold  by  him,  may,  under  certain  circumstances,  become 
entitled  to  the  benefit  of  his  purchase,  as  will  be  explained 
hereafter.1 

§  20.  Promotership  not  limited  to  period  anterior  to  organ- 
ization of  corporation.  —  There  is  nothing  to  limit  the  word 
"  promoters  "  to  persons  acting  before  the  company  is  formed, 
at  least  till  the  share  capital  is  engaged.2  The  work  of 
promotion  may  go  on  in  the  direction  of  securing  the 
capital  after  the  company  has  been  incorporated,  and 
the  question  as  to  when  one  who  in  the  outset  was  a 
promoter  continues  or  ceases  to  be  so,  becomes,  therefore, 
one  of  fact.  This  is  explained  by  Chief  Justice  Cockburn 
as  follows  :  — 

"  So  long  as  the  work  of  formation  continues,  those  who 
carry  on  the  work  must,  I  think,  retain  the  character  of 
promoters.  Of  course,  if  a  governing  body,  in  the  shape  of 
directors,  has  once  been  formed,  and  they  take,  as  I  need 
not  say  they  may,  what  remains  to  be  done  in  the  way  of 
forming  the  company  into  their  own  hands,  the  functions 
of  the  promoter  are  at  an  end.  But  so  long  as  the  pro- 
moters are  permitted  by  the  directors  to  carry  on  the  work 
of  formation,  the  latter  remaining  passive,  so  long,  I  think, 
would  a  jury  be  warranted  in  finding  that  what  was  done  by 
them  was  done  as  promoters."  3 

§  21.  Fiduciary  relation  of  promoters  to  corporation.  —  The 
analogy  of  the  relation  of  promoter  and  corporation  to  that 
of  trustee  and  cestui  que  trust  is  quite  close.  There  may  be 
trusts  for  unborn  persons,  enforceable  by  such  persons 
when  they  come  into  existence.  But  promoters  are  not 
technically  trustees.  Nevertheless  familiar  principles  of 

1  See  Sect.  55,  et  se.q. 

8  Bramwell,  L.  J.,  in  Twycross  v.  Grant,  2  C.  P.  D.  469,  503. 

a  Twycross  v.  Grant,  2  C.  P.  D.  469,  541. 


NATUKE   OF  PROMOTERSHIP.  21 

the  law  of  trusteeship  have  been  extended  to  meet  their 
case ;  and  it  is  held  that  a  fiduciary  relation  exists  between 
them  and  the  corporation  which  they  promote.  In  the 
opinion  of  Lord  Justice  Lindley,  it  is  objectionable  to  talk 
of  there  being  a  fiduciary  relation  to  a  company  before  the 
company  has  any  existence.1  Yet  a  non-existent  person 
may  sometimes  be  treated  as  an  existing  person,  with  the 
same  rights  in  certain  respects  as  if  in  existence.  Take, 
for  example,  the  case  of  unborn  persons  who  are  repre- 
sented by  a  guardian  ad  litem,  and  whose  consent,  through 
such  guardian,  is  given  or  withheld  to  a  decree  as  to  the 
subject-matter  of  a  controversy  in  which  they  may  become 
interested.  The  existence  of  a  fiduciary  relation  between 
the  promoter  and  the  corporation  is  fully  established  by  the 
authorities.  "  A  promoter,"  declared  James,  L.  J.,  "  is, 
according  to  my  view  of  the  case,  in  a  fiduciary  relation  to 
the  company  which  he  promotes  or  causes  to  come  into 
existence."  2  "  Promoters,"  said  Sir  George  Jessel,  "  stand 
in  a  fiduciary  relation  to  that  company  which  is  their  crea- 

1  Lydney  fr  Wigpool  Iron  Ore  Co.  v.  Bird,  33  Ch.  D.  at  p.  93. 
"The  real  relation  of  promoters  to  companies,"  says  Lord  Justice 
Lindley,  "  is  difficult  to  define  ;  the  relation  is  in  truth  SMI  generis,  and 
is  the  result  of  dealings  and  transactions  of  a  kind  not  known  until 
recent  times.  The  term  by  which  accurately  to  define  such  relation 
has  not  yet  been  discovered.  Familiarity  with  trusts  and  the  lan- 
guage employed  in  connection  with  them  has  led  to  the  description 
of  the  relation  as  a  fiduciary  relation,  and,  although  this  is  not  a  very 
happy  expression,  it  is  not  easy  to  suggest  a  better.  What  is  meant,  is 
that  although  there  is  no  actual  relation  of  trustee  and  cestui  que 
trust  between  a  promoter  and  an  unformed  company,  yet  that  when 
he  has  succeeded  in  forming  it,  he  is  liable  to  it,  in  respect  of  frauds 
practised  by  him  upon  it,  planned  by  means  of  agreements  entered 
into  before  its  formation  and  the  real  nature  of  which  is  carefully 
concealed  from  every  one,  except  those  who  profit  by  them.  The 
frauds  thus  perpetrated  are  obvious  when  discovered,  and  the  doctrine 
of  fiduciary  relation  has  been  invented  or  extended  in  order  to  defeat 
them."  Lindley's  Law  of  Companies,  5th  ed.  348. 

a  New  Sombrero  Phosphate  Co.  v.  Erlanger,  5  Ch.  D.  73. 


22     PROMOTEKS  AND  PROMOTION  OF  CORPORATIONS. 

tion."  l  Speaking  of  the  promoters  in  the  well-known  case 
of  Erlanger  v.  New  Sombrero  Phosphate  Co.?  Lord  Cairns 
said :  "  They  stand,  in  my  opinion,  undoubtedly  in  a  fiduci- 
ary capacity."  In  the  same  case,3  Lord  Blackburn,  noting 
the  fact  that  throughout  the  Companies  Act,  1862,  the 
word  "  promoters  "  is  not  used,  said :  "  Neither  does  this 
Act  in  terms  impose  any  duty  on  those  promoters  to  have 
regard  to  the  interests  of  the  company  which  they  are  thus 
empowered  to  create.  But  it  gives  them  an  almost  unlim- 
ited power  to  make  the  corporation  subject  to  such  regula- 
tions as  they  please,  and  to  create  it  with  a  managing  body 
whom  they  select,  having  such  powers  as  they  choose  to 
give  those  managers,  so  that  the  promoters  can  create  such 
a  corporation  that  the  corporation,  as  soon  as  it  comes  into 
being,  may  be  bound  by  anything,  not  in  itself  illegal,  which 
those  promoters  have  chosen.  And  I  think  those  who 
accept  and  use  such  extensive  powers,  which  so  greatly 
affect  the  interests  of  the  corporation  when  it  comes  into 
being,  are  not  entitled  to  disregard  the  interests  of  that 
corporation  altogether.  They  must  make  a  reasonable  use 
of  the  powers  which  they  accept  from  the  Legislature  with 
regard  to  the  formation  of  the  corporation,  and  that  re- 
quires them  to  pay  some  regard  to  its  interests.  And  con- 
sequently they  do  stand,  with  regard  to  that  corporation 
when  formed,  in  what  is  commonly  called  a  fiduciary  rela- 
tion to  some  extent." 

§  22.  Existence  of  such  relation  established  by  authorities. 
— "  The  case  of  a  promoter,"  observes  the  author  of  one  of 
the  leading  English  works  on  corporations,  "  seems  ail  ex- 
ceptionally strong  case  of  fiduciary  relationship,  inasmuch 
as  the  trustee  or  agent,  so  far  from  being  selected  by  his 

1  New  Sombrero  Phosphate  Co.  v.  Erlanger,  5  Ch.  D.  73. 
3  3  App.  Cas.  at  p.  1236. 
»  At  p.  1268. 


NATUKE   OF  PflOMOTERSHIP.  23 

cestui  que  trust  or  principal,  here  absolutely  creates  the 
principal  in  whose  affairs  he  acts ;  so  that  if  it  could  ever 
be  said  by  a  fraudulent  agent  to  a  person  whom  he  has  de- 
frauded, *  You  have  only  yourself  to  blame,  you  should  not 
have  trusted  me,'  such  an  argument  would  here  be  ex- 
cluded, for  the  company  had  no  choice  in  the  matter  as  to 
who  should  call  it  into  existence."  l  And  in  Yale  Gas 
Stove  Co.  v.  Wilcox?  the  Court  said :  "  That  such  persons 
(promoters)  occupy  a  fiduciary  relation  toward  the  com- 
pany or  corporation  whose  organization  they  seek  to  pro- 
mote, is  well  settled  by  the  decisions  of  both  countries." 

§  23.  Consequences  of  fiduciary  relationship.  —  While  the 
promoters  are  in  a  fiduciary  relation  to  the  corporation, 
they  must,  in  all  their  dealings  with  or  for  it,  act  fairly  and 
in  good  faith.  If  they  undertake  to  sell  property  to  it,  or  to 
make  contracts  with  it,  they  must  not  only  abstain  from 
misrepresentations,  but  they  must  fully  disclose  all  material 
facts  within  their  knowledge.  They  cannot  deal  with  it  as 
a  stranger  could ;  they  are  not  permitted  to  make  secret 
profits  at  its  expense,  and  will  be  held  accountable  for  such ; 
and  their  transactions  will  be  closely  scrutinized  by  a  Court 
of  Equity,  and  set  aside  for  any  unfairness  or  overreaching. 
Yet,  in  passing  on  such  transactions,  some  caution  must  be 
employed.  "  In  dealing  with  any  particular  case,"  said 
Lord  Justice  Lindley,  "  care  must  be  taken  not  to  be  misled 
by  words.  Owing  to  the  ambiguity  in  the  meaning  of  the 
word  *  promoter,'  and  the  difficulty  of  defining  his  exact  re- 
lation to  the  company  he  procures  to  be  formed,  it  is  unsafe 
to  say  that  any  particular  person  was  a  promoter  of  a  par- 
ticular company,  and  to  infer  from  thence  that  he  is  liable 
to  account  to  it  as  if  he  had  been  its  trustee.  The  question 

1  Buckley's  Companies  Acts,  5th  ed.  p.  543. 

8  64  Conn,  at  p.  119.  See  also  Plaquemines  Tropical  Fruit  Co.  v. 
Buck,  52  N.  J.  Eq.  219. 


24    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

in  each  case  must  be,  what  has  the  so-called  promoter  done 
to  make  himself  liable  to  the  demand  against  him  ?  What 
fraud  or  breach  of  trust  has  he  committed  or  been  party  or 
privy  to  ?  If  none,  he  is  under  no  liability ;  if  any,  he  is 
liable  accordingly  by  whatever  name  he  may  be  called,  or 
by  whatever  terms  his  relation  to  the  company  may  be  ex- 
pressed." 1 

1  Lindley's  Law  of  Companies,  5th  ed.  349. 


DUTIES   OF   PKOMOTERS  TO  THE   CORPORATION. 


25 


CHAPTER  II. 


DUTIES  OP  PROMOTERS  TO  THE  CORPORATION. 


§  24.    Duties  of  promoters  in  organ- 
ization of  corporation. 

25.  Erlanger   v.   New    Sombrero 

Phosphate  Co.,  3  App.  Gas. 
1218. 

26.  Judgment  of  Lord  Cairns. 

27.  Exception  to  rule  laid  down 

by  Lord  Cairns. 

28.  Promoters  must  disclose  their 

interest  in  transactions  with 
corporation. 

29.  As  vendors  of  corporation  not 

always  bound   to   disclose 
cost  of  property  to  them. 

30.  Under    some    circumstances 

must  disclose  such  cost. 

31.  Trustees    not    permitted    to 

make  secret  profit  in  matter 
of  trusteeship. 

32.  Similar  rule  applies  to  pro- 

moters. 

83.  Mere  declaration  that  pro- 
moter is  interested  not 
enough  when  made  to  the 
directors  only. 


§  34.  Imperial  Mercantile  Credit 
Association  v.  Coleman,  L. 
R.  6  H.  L.  189. 

35.  Disclosure    of   interest    only 

sufficient  if  made  to  the 
shareholders. 

36.  Full  disclosure  must  be  made. 

37.  In  re  Westmoreland  Green  & 

Blue  Slate  Co.,  2  Ch.  (1893) 
612. 

38.  To  whom  disclosure  must  be 

made  and  by  whom  acted 
upon. 

39.  Effect  of  disclosure  to,  and 

consent  by,  all  the  share- 
holders representing  entire 
capital  stock. 

40.  Effect  of    disclosure  to   and 

consent  by  all  the  existing 
shareholders,  when  entire 
capital  stock  not  issued. 

41.  Ultra  vires  acts  not  validated 

by  disclosure  to  and  con- 
sent by  all  the  shareholders. 


§  24.  Duties  of  promoters  in  organization  of  corporation.  — 
As  promoters  are  bound  to  act  fairly  and  with  good  faith 
in  availing  themselves  of  the  powers  and  opportunities 
accorded  to  them  by  the  law  authorizing  the  creation  of 
corporations,  it  follows  as  a  rule  that  in  organizing,  or  in 
procuring,  through  others  under  their  control,  the  organiza- 
tion of  a  corporation  to  purchase  or  take  a  lease  of  their 
own  property  or  property  in  which  they  have  an  interest, 
or  to  enter  into  a  contract  in  which  they  are  interested,  it 


26  PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

is  their  duty,  so  far  as  they  have  the  power  and  opportunity, 
to  see  that  a  competent  and  disinterested  board  of  directors 
is  chosen,  in  order  that  the  corporation  may  have  proper 
protection  when  it  comes  to  a  determination  of  the  ques- 
tion whether  or  not  it  is  expedient  for  it  to  enter  into  the 
proposed  transaction.  And  it  is  their  duty  not  only  to 
provide  a  board  of  directors  who  can  exercise  an  independ- 
ent and  intelligent  judgment  on  the  transaction,  but  to  see 
that  they  do  exercise  such  judgment. 

§  25.  In  Erlanger  v.  New  Sombrero  Phosphate  Co.,1  —  the 
facts  were  that  a  syndicate  of  which  Baron  Erlanger,  a 
Paris  banker,  was  at  the  head,  purchased  for  £55,000,  from 
the  official  liquidator  of  an  insolvent  company,  an  island 
said  to  contain  valuable  mines  of  phosphate.  Erlanger, 
who  managed  the  business  of  this  purchase,  proceeded  to 
get  up  a  company  to  take  over  the  island  and  to  work  the 
mines.  He  named  five  persons  as  directors.  Two  were 
abroad ;  of  the  three  others,  two  were  persons  entirely 
under  his  control,  and  were  furnished  by  him  with  the 
shares  necessary  to  qualify  them  for  the  office.  One  of 
these  two  persons  appeared  to  have  acted  as  a  business 
agent  for  Erlanger;  the  other  was  a  private  friend  of 
Erlanger.  The  sale  of  the  island  was  made,  nominally,  by 
a  person  who  had  really  no  interest  in  the  island,  and  was 
made  to  the  director  who  was  the  business  agent  of 
Erlanger,  and  who  appeared  as  the  purchaser  for  the  com- 
pany. The  price  was  £80,000  in  cash  and  £30,000  in 
paid-up  shares  of  the  company.  The  two  directors,  with 
whom,  through  Erl anger's  arrangement,  a  third  person 
(one  entirely  uninformed  on  the  subject  of  the  original 
purchase  and  the  subsequent  sale)  was  associated,  assum- 
ing to  act  as  directors  of  the  company,  accepted,  on  its 
behalf,  the  purchase.  The  price  paid  by  the  syndicate  for 

1  3  App.  Cas.  at  p.  1236. 


DUTIES   OF  PROMOTEKS   TO   THE   CORPORATION.  27 

the  island  was  not  disclosed.  Subsequently  a  bill  filed  by 
the  company  to  rescind  the  contract  was  sustained.  "  I 
cannot,"  said  Lord  Cairns, "  but  regard  a  meeting  at  which 
two  of  the  principal  directors  did  not  and  could  not  attend, 
at  which  one  who  did  attend  and  take  part  in  the  delibera- 
tions was  at  once  a  person  buying  and  selling,  where  the 
legal  adviser  present  and  assisting  was  virtually  another 
vendor,  and  where  the  two  remaining  directors  are  not 
shown  to  have  had  the  means  of  exercising,  or  to  have 
exercised,  any  intelligent  judgment  on  the  subject,  as  little 
else  than  a  mockery  and  a  delusion." 

§  26.  Judgment  of  Lord  Cairns.  —  Lord  Cairns  laid  down 
the  duties  of  promoters  in  the  position  occupied  by  the 
promoters  in  the  above  case,  as  follows :  — 

"  They  stand,  in  my  opinion,  undoubtedly  in  a  fiduciary 
capacity.  They  have  in  their  hands  the  creation  and  mould- 
ing of  the  company ;  they  have  the  power  to  define  how  and 
when  and  in  what  shape,  and  under  what  supervision,  it  shall 
start  into  existence  and  begin  to  act  as  a  trading  corporation. 
If  they  are  doing  all  this  in  order  that  the  company  may, 
as  soon  as  it  starts  into  life,  become,  through  its  managing 
directors,  the  purchaser  of  the  property  of  themselves,  the 
promoters,  it  is,  in  my  opinion,  incumbent  upon  the  pro- 
moters to  take  care  that  in  forming  the  company  they 
provide  it  with  an  executive,  that  is  to  say,  with  a  board  of 
directors  who  shall  both  be  aware  that  the  property  which 
they  are  asked  to  buy  is  the  property  of  the  promoters,  and 
who  shall  be  competent  and  impartial  judges  as  to  whether 
the  purchase  ought  or  ought  not  to  be  made.  I  do  not  say 
that  the  owner  of  property  may  not  promote  and  form  a 
joint-stock  company,  and  then  sell  his  property  to  it ;  but  I 
do  say  that  if  he  does  he  is  bound  to  take  care  that  he  sells 
it  to  the  company  through  the  medium  of  a  board  of  direc- 
tors who  can  and  do  exercise  an  independsnt  and  intelli- 


28  PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

gent  judgment  on  the  transaction,  and  who  are  not  left 
under  the  belief  that  the  property  belongs,  not  to  the  pro- 
moter, but  to  some  other  person." 1 

§  27.  Exceptions  to  rule  laid  down  by  Lord  Cairns.  —  It  IS 
not  an  inflexible  rule,  however,  that  promoters  who  bring 
a  corporation  into  existence  in  order  that  it  may  enter  into 
some  contract  in  the  subject-matter  of  which  they  them- 
selves have  a  personal  interest,  must  under  all  circum- 
stances provide  the  corporation  with  a  disinterested  board 
of  directors  to  guard  its  interests  in  the  matter.  A  trustee 
is  not  absolutely  disqualified  from  acting  in  a  transaction, 
because  he  has  an  interest  therein  adverse  to  that  of  his 
cestui  que  trust.  If  he  acts  with  the  knowledge  and  acqui- 
escence of  the  cestui  que  trust,  and  is  guilty  of  no  deception 
or  unfairness,  his  acts  are  valid.  Not  infrequently  in  the 
case  of  a  purchase  or  contract,  promoters  act  for  themselves 
on  the  one  side,  and  for  the  corporation  on  the  other,  or 
the  corporation  is  represented  in  the  transaction  by  persons 
controlled  by  or  subject  to  the  influence  of  the  promoters. 
In  such  case,  their  doings  are  not  subject  to  attack,  pro- 
vided they  observe  the  rule  in  relation  to  disclosure,  and 
do  not  abuse  their  influence,  or  practise  any  unfairness  or 
imposition.2  Again,  it  may  not  rest  with  the  promoters  to 
nominate  the  directors.  In  the  majority  of  cases,  perhaps, 
the  enabling  act  contemplates  that  the  first  directors  shall 
be  named  by  the  promoters  or  corporators,  and  they  are  so 
named ;  but  in  some  instances,  in  the  organization  of  the 
corporation,  the  directors  are  chosen  by  the  subscribers  for 
shares,  and  when  this  happens,  and  the  subscribers  consti- 
tute an  independent  body,  the  rule  laid  down  by  Lord 
Cairns  is  not  applicable.  The  promoters  may  become  the 

1  See  also  Plaquemines  Tropical  Fruit   Co.  v.  Buck,  52  N.  J.   Eq. 
219. 

2  Densmore  Oil  Co.  v.  Densmore,  64  Penn.  43. 


DUTIES   OF   PROMOTERS   TO   THE   CORPORATION.  29 

original  shareholders,  owning  all  the  shares  of  the  capital 
stock ;  and  then  the  rule  is  inapplicable.1 

§  28.  Promoters  must  disclose  their  interest  in  transactions 
with  corporation.  —  The  rule  as  to  disclosure  requires  a 
statement  by  the  promoters  of  any  interest  they  may  have 
in  a  transaction  with  the  corporation.  Occupying  a  double 
position,  where  interest  may  conflict  with  duty,  they  must 
make  it  known,  and  must  state  the  nature  of  that 
interest.2 

If  the  promoters  sell,  or  cause  to  be  sold,  to  the  corpora- 
tion property  purchased  by  them,  or  in  which  they  acquired 
an  interest  by  purchase,  when  promoters,  for  the  purpose 
of  resale  to  the  corporation,  they  must  disclose  what  they 
paid  for  it ;  because  the  benefit  of  the  purchase  belongs  to 
the  corporation,  and  unless  the  corporation  consents  to 
their  retaining  a  profit,  they  must  turn  the  property  in 
for  what  they  gave  for  it.3 

§  29.  As  vendors  of  corporation,  not  always  bound  to  dis- 
close cost  of  property  to  them.  —  When  the  promoters  have 
purchased  or  acquired  an  interest  in  the  property  before 
they  begin  to  promote  the  corporation,  they  may,  under 
some  circumstances,  make  a  sale  to  the  corporation  at  an 
advance,  without  disclosing  the  price  which  they  paid.  It 

1  See  Sect.  39.    Erlanger  v.  New  Sombrero  Co.  "  is  a  case  which  is 
often  quoted  and  not  unfrequently  misunderstood.     Of  course  Lord 
Cairus's  observations  were  directed  only  to  a  case  such  as  he  had 
before  him,  where  it  was   attempted  to  bind  a  large  body  of  share- 
holders by  a  contract  which  purported  to  have  been  made  between  the 
vendor  and  the  directors  before  the  shares  were  offered  for  subscrip- 
tions, whereas  it  appeared  that  the  directors  were  only  the  nominees  of 
the  vendor,  who  had  accepted  his  bidding,  and  exercised  no  judgment 
of  their  own."  —  Lord  Davy,  in  Salomon  v.  Salomon  Sf  Co.,  75  L.  T.  Rep. 
at  p.  437. 

2  Erlanger  v.  New  Sombrero  Phosphate  Co.,  3  App.  Cas.  1218. 

8  In  re  Ambrose  Lake  Tin  fr  Copper  Mining  Co.,  14  Ch.  D.  398  ; 
Ladywell  Mining  Co.  v.  Brooks,  35  Ch.  D.  400. 


30     PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

was  so  held  in  Densmore  Oil  Co.  v.  Densmore,1  the  Court 
saying,  through  Sharswood,  Ch.  J. :  "  Any  man  or  number 
of  men  who  are  the  owners  of  any  kind  of  property  may 
form  a  co-partnership  or  association  with  others,  and  sell 
that  property  to  the  association  at  any  price  which  may 
be  agreed  on  between  them,  no  matter  what  it  may  have 
originally  cost,  provided  there  be  no  fraudulent  misrepre- 
sentations made  by  the  vendors  to  their  associates.  They 
are  not  bound  to  disclose  the  profit  they  may  realize  by  the 
transaction.  They  were  in  no  sense  agents  or  trustees  in 
the  original  purchase,  and  it  follows  that  there  is  no  confi- 
dential relation  between  the  parties  which  affects  them 
with  any  trust."2 

§  30.  Under  some  circumstances  must  disclose  such  cost.  — 
It  is  to  be  noted  that  in  the  above  case  the  fact  that  the 
promoters  of  the  corporation  were  the  vendors,  was  made 
known,  the  property  was  sold  to  the  corporation  at  a  fair 
price,  and  there  were  no  circumstances  connected  with  its 
acquisition  by  the  vendors  which  rendered  knowledge  of 
the  anterior  price  paid  by  them  material.  Moreover,  the 
original  holders  of  all  the  shares  acquiesced  in  the  transac- 
tion. The  cost  price  of  property  affords  some  evidence  as 
to  its  value,  and  in  some  cases  it  may  be  of  much  import- 
ance, and  a  fact  which  promoters  who  occupy  a  fiduciary 
position  and  are  bound  to  the  exercise  of  the  greatest  good 
faith,  ought  to  disclose.  In  New  Sombrero  Phosphate  Co. 
v.  Erlanger?  where  the  promoters  sold  to  the  corporation, 
for  .£110,000,  an  island  which  they  had  but  a  few  days 

1  64  Penn.  43.     See  also  Burbank  v.  Dennis,  101  Cal.  90. 

2  But  because  they  did  not  occupy  a  position  of  trust  toward  the  cor- 
poration in  their  purchase,  it  does  not  follow  that  they  were  not  in  such 
position  on  their  sale  to  the  corporation.     See  observations  as  to  this 
in  Taylor  on  Corporations,  2ded.  Sect.  83,  n.  1.     The  true  grounds  for 
the  decision  are  those  indicated  in  the  succeeding  section. 

8  5  Ch.  D.  at  p.  112. 


DUTIES   OF   PROMOTERS   TO   THE   CORPORATION.  31 

before  purchased  for  £55,000,  Jessel,  M.  R.,  said :  "  I  do 
not  think  it  is  absolutely  necessary  that  in  all  cases  the 
price  given  should  be  stated,  but  looking  at  the  peculiar 
position  of  the  parties,  I  think  it  was  necessary  here." 
If  the  fact  that  the  promoters  own  the  property,  or 
have  an  interest  in  it,  should  be  disclosed  to  the  share- 
holders, it  might  suffice,  without  a  statement  of  the 
anterior  price  paid  by  them,  when  a  similar  disclosure 
to  the  directors  of  the  corporation  would  be  regarded  as 
insufficient.1 

§  31.  Trustees  not  permitted  to  make  secret  profit  out  of 
trusteeship.  —  It  is  a  familiar  rule  of  Equity  that  a  trustee 
is  never  permitted  to  make  a  secret  profit  in  the  matter  of 
his  trusteeship.  "It  is,"  said  Knight  Bruce,  V.C.,  "the 
danger  of  the  commission  of  fraud  in  a  manner  and  under 
circumstances  which,  in  the  great  majority  of  instances, 
must  preclude  detection,  that  in  the  case  of  trustees,  and 
all  parties  whose  character  and  responsibilities  are  similar 
(for  there  is  no  magic  in  the  word),  induces  the  Court 
(not  only  for  the  sake  of  justice  in  the  individual  case,  but 
for  the  protection  of  the  public  generally,  and  with  a  view 
to  assert  and  vindicate  the  obligation  of  plain  and  direct 
dealing  between  man  and  man  in  all  cases,  but  especially 
in  those  where  one  man  is  intrusted  by  another)  to  adhere 
strictly  to  the  rule,  that  no  profit  of  any  description  shall 
be  made  by  a  person  so  circumstanced,  .  .  .  saying  to  the 
person  complaining  that  he  has  thus  employed  his  time 
and  skill  without-  remuneration,  that  he  has  elected  so  to 
treat  the  matter ;  that  he  has  had  his  reward,  for  he  has 
had  the  possibility,  nay,  the  probability,  of  retaining  to 
himself  that  which  he  never  ought  to  have  retained ;  that 

1  See  Lord  Cairns's  observation  as  to  this  in  Imperial  Mercantile 
Credit  Association  v.  Coleman,  L.  R.  6  H.  L.  at  p.  206. 


32  PROMOTERS   AND   PROMOTION  OF   CORPORATIONS. 

he  has  been  willing  to  run  the  risk,  and  cannot  complain 
if  he  happens  to  lose  the  stake."1 

§  32.  Similar  rule  applies  to  promoters.  —  This  rule  is  gen- 
erally applicable  to  promoters.  Consequently,  it  is  their  duty 
to  disclose  to  the  corporation  the  nature  and  amount  of  any 
profit  or  remuneration,  whether  in  money,  shares,  or  other- 
wise, which  they  are  to  receive,  in  connection  with  the 
promotion  of  the  corporation,  or  in  consideration  of  services 
rendered  by  them  in  the  course  of  such  promotion.  The 
promoters  are  as  a  rule  entitled  to  retain  the  profit  or  re- 
muneration only  when  the  corporation  has  assented  thereto 
after  such  disclosure.2 

§  33.  Mere  declaration  that  promoter  is  interested  not 
enough  when  made  to  directors  only.  —  The  requirement  as 
to  disclosure  is  not  satisfied  by  a  mere  declaration  by  the 
promoter  that  he  has  an  interest  or  that  he  is  to  obtain  a 
profit  arising  out  of  or  in  connection  with  the  promotion 
of  the  corporation.  He  must  state  the  nature  of  his  inter- 
est, the  amount  he  is  going  to  receive.  At  least  this  is  so 
when  the  disclosure  is  made,  not  to  the  shareholders,  but 
to  the  directors,  and  the  consent  of  the  corporation  is  given 
by  the  directors. 

§  34.  Illustrative  case.  —  Thus,  in  Imperial  Mercantile 
Credit  Association  v.  Coleman,8  the-  plaintiff  corporation 
was  formed  for  the  purpose  of  carrying  into  effect  loans 
and  other  financial  operations.  The  defendant,  Coleman, 

1  Benson  v.  HeatTiorn,  1  Y.  &  C.  326. 

2  Bagnall  v.  Carlton,  6  Ch.  D.  371 ;  Emma  Silver  Mining  Co.  v. 
Grant,  11   Ch.  D.  918  ;  Emma  Silver  Mining  Co.  v.  Lewis,  4  C.  P.  D. 
396  ;   Whaley  Bridge  Calico  Printing  Co.  v.  Green,  5  Q.  B.  D.  109  ; 
Lydney  fy  Wigpool  Iron  Ore  Co.  v.  Bird,  33  Ch.  D.  85  ;  In  re  West- 
moreland Green  if  Blue  Slate  Co.,  2  Ch.  (1893)  612;  Chandler  v.  Bacon, 
30  Fed.  Rep.  538 ;  Yale  Gas  Stove  Co.  v.    Wilcox,  64  Conn.  105  ; 
McElheney's  Appeal,  61  Penn.  188. 

«  L.  R.  6  H.  L.  189. 


DUTIES   OF   PROMOTERS   TO   THE   CORPORATION.  33 

who  carried  on  business  as  a  stockbroker,  was  a  director. 
Having  entered  into  an  arrangement  with  the  contractors 
of  a  certain  railway  company  to  place  its  debentures  for  a 
commission  of  five  per  cent.,  he  proposed,  at  a  meeting  of 
the  directors  of  the  plaintiff  corporation,  that  the  corpora- 
tion should  place  the  debentures  at  a  commission  of  one 
and  one-half  per  cent.  In  doing  so  he  stated  that  he  had 
an  interest  in  the  transaction,  but  was  silent  as  to  the 
arrangement  which  he  had  made  with  the  contractors. 
The  proposal  was  adopted,  and  debentures  to  a  very  large 
amount  were  placed  by  the  corporation.  It  was  held  that 
inasmuch  as  his  fellow-directors  might  have  been  under 
the  impression  that  he  merely  took  his  ordinary  commis- 
sion as  a  stockbroker,  and  thereupon  confirmed  the  trans- 
action, he  was  liable  to  refund  all  his  profits,  because  it 
turned  out  that  he  had  made  a  large  and  extraordinary 
profit,  beyond  the  usual  commission  of  a  stockbroker ;  and 
it  was  decided  that  he  was  compellable  to  state  not  only 
that  he  had  an  interest,  but  what  interest  it  was,  before  he 
could  sustain  the  transaction. 

§  35.  Disclosure  of  interest  only,  sufficient  if  made  to  the 
shareholders.  —  It  would  seem  that  if  promoters  disclose  to 
the  stockholders  the  fact  that  they  are  to  receive  compen- 
sation or  profit  in  the  promotion  of  the  corporation,  and 
the  stockholders  assent  thereto,  the  disclosure  will  be  suffi- 
cient. Apparently,  under  such  circumstances,  it  is  not 
necessary  that  the  amount  of  the  profit  or  compensation 
should  be  stated.  In  the  case  above  referred  to,  it  was 
contended,  on  the  defendant's  behalf,  that  having  stated  at 
a  director's  meeting  that  he  had  an  interest  in  the  transac- 
tion under  consideration,  it  was  open  to  the  directors  who 
were  there  present  to  have  cross-questioned  him,  and  to 
have  elicited  from  him  what  his  interest  really  was.  Com- 
menting on  this,  Lord  Cairns  said  :  "  If  this  had  been  a  case 

8 


34  PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

in  which  a  person  standing  in  a  fiduciary  relation  to 
another  had,  in  the  presence  of  another,  stated  that  he  had 
an  interest,  and  that  other  was  able  to  ask  some  further 
questions  as  to  what  his  interest  was,  I  should  have  thought 
a  good  deal  of  weight  might  be  attributed  to  this  argument. 
But  it  was  not  to  the  company,  or  even  to  a  general  meet- 
ing of  the  company,  that  Mr.  Coleman  stated  that  he  had 
an  interest.  It  was  to  some  other  persons,  who  were  just 
as  much  in  a  fiduciary  position  as  he  was  himself,  and  in 
my  opinion  it  was  not  open  to  Mr.  Coleman  .  .  .  merely  to 
state  to  those  other  trustees  what  might  have  led  them  to 
make  further  inquiry,  but  to  leave  it  open  to  the  chance  of 
whether  they  would  make  that  inquiry  or  not." 1 

§  36.  Full  disclosure  must  be  made.  —  A  provision  in  the 
articles  of  association  that  the  validity  of  a  stated  transac- 
tion with  the  company  shall  not  be  impeached  on  the 
ground  that  the  promoters  are  interested  therein,  does 
not  obviate  the  necessity  of  full  disclosure,  by  the  pro- 
moters, of  their  position  and  interest  in  respect  to  such 
transaction. 

§  37.  In  In  re  Westmoreland  Green  and  Blue  Slate  Co.,2  — 
Poole  and  Binns  were  working  a  quarry  in  partnership. 
Poole  had  the  option  of  taking  a  lease  of  another  quarry 
known  as  Stone  Dykes.  Wishing  to  form  a  company  to 
work  these  quarries,  they  employed  Ashworth  and  Bland 
to  assist  them  in  getting  up  the  company.  On  the  16th  of 
February,  1886,  Poole,  Binns,  Ashworth,  and  Bland  entered 
into  an  agreement,  in  which  they  were  called  the  vendors, 
with  a  trustee  for  the  intended  company,  to  hand  over  the 
quarries  to  the  proposed  company.  It  was  agreed  that  the 
vendors  should  sell,  and  the  company  should  purchase, 

1  Imperial  Mercantile  Credit  Association  v.  Coleman,  L.  R.  6  H.  L. 
at  p.  206. 

2  2  Ch.  (1893)  612. 


DUTIES   OF   PKOMOTEKS   TO   THE   CORPORATION.  35 

"the  interest  of  the  vendors  in  Stone  Dykes  under  the 
lease,"  in  addition  to  other  properties,  and  that  Bland  and 
Ashworth  should  each  receive  120  of  the  paid-up  shares 
issued  by  the  company  in  part  payment  of  the  purchase 
price.  On  the  same  day  a  lease  of  Stone  Dykes  was 
granted  to  the  four  promoters.  The  articles  of  the  com- 
pany referred  to  this  agreement  and  provided  that  the 
directors  should  adopt  it  on  behalf  of  the  company,  with  or 
without  modification.  The  fourth  article  was  as  follows  : 
"  The  validity  of  such  agreement  shall  not  be  impeached 
on  the  ground  that  the  directors  of  the  company  or  any  of 
them  are  interested  therein  as  vendors  or  otherwise,  or 
that  they  are  the  promoters  of  the  company,  nor  shall  they 
be  accountable  for  the  benefits  secured  to  them,  or  which 
they  or  any  of  them  may  obtain  under  such  agreement, 
and  every  member  shall  be  deemed  to  have  had  notice  of 
the  terms  of  such  agreement  and  to  approve  and  sanction 
the  same,  modified  or  not  as  the  case  may  be." 

In  accordance  with  the  agreement  the  quarries  were 
transferred  to  the  company,  and  Bland  and  Ashworth  re- 
ceived their  shares.  Subsequently,  in  the  winding  up  of 
the  company,  Bland  was  compelled  to  contribute  to  the 
company's  assets  the  par  value  of  the  shares  received  by 
him.  The  Court,  holding  that  the  transaction  in  question 
was  an  attempt  to  evade  the  law  as  to  secret  profits,  Bland 
and  Ashworth  not  being  real  vendors,  said  :  "  Is  there  any- 
thing in  the  articles  to  protect  the  transaction  ?  Article  4 
is  relied  on  by  the  appellant,  and  its  words  are  very  wide. 
But  though  Poole,  Binns,  Ashworth,  and  Bland  knew  all  the 
facts  of  the  case  when  the  directors  passed  a  resolution  for 
adopting  the '  agreement,  what  did  the  company  know  ? 
The  company  knew  that  Bland  and  Ashworth  were  among 
the  lessees  of  Stone  Dykes,  but  they  did  not  know  that 
making  them  lessees  was  merely  machinery  to  obtain  for 


36     PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

them  payment  for  their  services.  This  prevents  the  appel- 
lant from  claiming  protection  under  the  4th  article." 

§  38.  To  whom  disclosure  must  be  made  and  by  whom 
acted  upon. — Facts  which  it  is  incumbent  upon  promoters  to 
disclose  to  the  corporation  are  sufficiently  disclosed  if  com- 
municated to  a  competent  and  disinterested  board  of  direc- 
tors, or,  when  the  directors  are  interested  or  are  under  the 
control  of  the  promoters,  if  communicated  to  the  share- 
holders. There  must  ordinarily  be  an  independent  board 
or  body  of  shareholders  to  receive  and  act  upon  the  in- 
formation.1 But  if  the  facts  are  made  known  through 
prospectuses  or  otherwise,  and  the  public  then,  with 
notice,  come  in  and  subscribe  for  the  shares,  it  will  suffice.2 

§  39.  Effect  of  disclosure  to  and  assent  by  all  the  share- 
holders representing  entire  capital  stock.  —  It  is  no  objection 
that  the  shareholders  to  whom  disclosure  is  made  and  who 
acquiesce  in  the  transaction,  do  not  constitute  an  independ- 
ent body, provided  the  entire  capital  stock  of  the  corporation 
has  been  issued  and  is  held  by  such  shareholders.  In  such 
case  the  assent  of  all  the  shareholders  is  the  assent  of  the 
corporation,  and  subsequent  shareholders  will  not  be  heard 
to  complain,  unless  the  transaction  was  ultra  vires  the  cor- 
poration.3 Thus  in  Parsons  v.  Hayesf  a  mining  corpora- 
tion was  formed  under  the  general  laws  of  the  State  of 
New  York,  with  an  authorized  capital  of  $2,000,000.  The 

1  Erlanger  v.  New  Sombrero  Phosphate    Co.,   3   App.  Cas.   1218; 
In  re  Fitzroy  Bessemer  Steel  Co.,   50  L.  T.  Rep.  N.  s.  144 ;  Simons  v. 
Vulcan  Oil  Co.,  61  Perm.  202. 

2  Densmore  Oil  Co.  v.  Densmore,  64  Penn.  43. 

8  Salomon  v.  Salomon  fy  Co.,  75  L.  T.  Rep.  426  ;  In  re  Ambrose 
Lake  Tin  fr  Copper  Mining  Co.,  14  Ch.  D.  390  ;  In  re  Gold  Co.,  11 
Ch.  D.  701;  Parsons  v.  Hayes,  14  Abb.  N.  C.  419;  Seymour  v. 
Spring  Forest  Cemetery  Association,  144  N.  Y.  334 ;  Densmore  Oil  Co. 
v.  Densmore,  64  Penn.  43 ;  Higgins  v.  Lansingh,  154  111.  331 ;  Foster 
v.  Sei/mour,  23  Fed.  Rep.  65. 

4  14  Abb.  N.  C.  419. 


DUTIES   OF  PKOMOTEKS  TO  THE   CORPORATION.  37 

directors  named  in  the  certificate  of  incorporation  issued 
paid-up  certificates  for  the  entire  capital  stock,  in  payment 
for  a  mine  which  they  had  purchased  in  behalf  of  the 
corporation  for  $2,000,000,  but  which  in  reality  and  to 
their  knowledge  was  worth  less  than  $150,000.  Of  the 
stock  thus  issued,  they  received  as  a  gift  from  the  vendor 
of  the  mine  a  certain  number  of  shares,  in  accordance  with 
a  previous  arrangement.  These  shares  were  subsequently 
acquired  by  an  innocent  purchaser,  who,  upon  learning  all 
the  facts,  brought  a  shareholder's  bill  against  the  corpora- 
tion and  the  directors  who  had  authorized  the  original  issue 
of  stock.  It  was  sought  by  the  bill  to  compel  the  individual 
defendants  to  account  to  the  corporation  either  for  the 
difference  between  the  value  of  the  mine  and  the  nominal 
value  of  the  shares  issued  in  payment  therefor,  or  for  the 
profits  which  they  had  obtained  from  the  sale  of  the  shares 
given  to  them  by  the  vendor  of  the  mine.  It  was  held  that 
as  the  acts  complained  of  were  done  with  the  consent  of 
the  holders  of  the  entire  capital  stock,  neither  the  corpora- 
tion, nor  its  shareholders,  could  complain.  "  The  vendor 
of  the  property,"  observes  Mr.  Morawetz,  commenting  on 
the  decision,  "  in  truth  took  back  what  he  gave.  He  placed 
the  property  in  the  corporate  name,  and  at  the  same  time 
practically  became  the  corporation  by  becoming  its  sole 
stockholder.  Evidently,  therefore,  no  person  was  injured 
by  that  transaction.  If  subsequent  transferees  of  shares 
were  deceived  by  the  false  representations  that  the  amount 
of  the  shares  had  in  fact  been  paid  into  the  treasury  of  the 
company,  their  claim  should  have  been  for  the  damages 
caused  to  themselves  individually  through  the  false  repre- 
sentations, and  not  for  an  infringement  of  the  collective 
or  corporate  rights  of  all  the  shareholders."1 

1  Morawetz  on  Corporations,  Sect.  290.     And  if  the  corporation  is 
a  real  one,  and  not  a  fiction  or  a  myth,  there  is,  in  the  absence  of 


38  PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

§  40.  Effect  of  disclosure  to  and  assent  by  all  the  existing 
shareholders,  when  entire  capital  stock  not  issued.  —  Even 
when  the  entire  capital  stock  has  not  been  issued,  if  dis- 
closure is  made  to  the  existing  shareholders,  and  it  is  their 
honest  intention  at  the  time  not  to  take  in  new  members,  it 
cannot  be  said  that  there  is  any  secrecy  or  want  of  commu- 
nication of  facts,  although  shareholders  may  subsequently 
come  in  without  notice.  Thus  in  In  re  British  Seamless  Pa- 
per Box  Co.,1  a  company  was  formed  with  an  authorized  capi- 
tal of  <£  50,000,  and  patents  and  machinery  were  transferred 
to  it  in  consideration  of  shares  to  the  amount  of  £  32,000. 
The  vendors  transferred  certain  of  the  shares  thus  received 
by  them  to  four  of  the  directors.  The  vendors  and  the  direc- 
tors, who  were  the  promoters  of  the  company,  and  who  with 
the  solicitor  assented  to  what  was  done,  were  then  the  only 
shareholders  of  the  company.  They  did  not  issue  a  pro- 
spectus, nor  did  they  invite  other  persons  to  take  shares, 
and  it  was  not  their  intention  to  take  in  any  other  mem- 
bers. Subsequently  the  company  needed  more  capital,  and 
shares  were  issued  and  disposed  of  to  third  persons  who, 
upon  the  failure  of  the  company,  alleged  that  they  were  not 
informed  of  the  manner  in  which  the  original  shares  had 
been  allotted.  It  was  held,  in  the  winding  up,  that  the 
official  liquidator,  as  representing  the  company,  could  not 
call  upon  the  directors  to  account  for  the  shares  which  they 
had  received  from  the  company's  vendors.2 

§  41.  Ultra  vires  acts  not  validated  by  disclosure  to  and 
assent  by  all  the  shareholders.  —  The  rule  stated  as  to  the 

fraud,  no  liability  to  corporate  creditors.  See  the  recent  important 
case,  Salomon  v.  Salomon  Sf  Co.,  75  L.  T.  Rep.  426,  reversing  2  Ch. 
(1895)  323.  For  a  discussion  of  the  question  of  liability  to  corporate 
creditors,  see  Cook  on  Stockholders,  Sects.  46,  47. 

1  17  Ch.  D.  467. 

2  See  also  Stewart  v.  St.  Louis  Sf  Fort  Scott  R.  R.  Co.,  41  Fed.  Rep. 
736;  St.  Louis  if  Fort  Scott  R.  R.  Co.  v.  Tiernan,  37  Kan.  606. 


DUTIES   OF   PROMOTERS   TO   THE   CORPORATION.  39 

effect  of  acquiescence  by  the  original  shareholders  is  not 
applicable  when  the  transaction  brought  in  question  is  ultra 
vires  the  corporation.  The  unanimous  consent  of  all  the 
shareholders  cannot  validate  such  a  transaction  as  against 
a  subsequent  dissenting  shareholder.1  In  Mann  v.  Edin- 
burgh Northern  Tramways  Co.,2  the  company  named  was 
formed  under  a  private  Act  of  Parliament,  for  the  purpose 
of  introducing  a  system  of  tramways  into  Edinburgh,  and 
entered  into  an  agreement  with  a  corporation  called  the 
Cable  Corporation  for  the  construction  of  its  lines,  for  the 
sum  of  £93,000,  the  Cable  Corporation  undertaking  to  de- 
fray the  expenses  of  obtaining  the  A  ct  of  Parliament.  This 
agreement  was  negotiated  by  Mann  and  Beattie,  in  behalf 
of  the  Tramways  Company,  Mann  being  its  solicitor  and 
Beattie  its  engineer,  and  both  its  chief  promoters.  At  the 
same  time,  Mann  and  Beattie  entered  into  an  agreement  in 
their  own  behalf  with  the  Cable  Corporation,  by  which  they 
themselves  undertook,  in  consideration  of  the  payment  to 
them  by  the  Cable  Corporation  of  the  sum  of  £17,000,  to 
defray  all  the  expenses  of  obtaining  the  Act.  The  £17,000 
was  paid  to  them  by  the  Cable  Corporation  from  the 
£93,000  received  by  that  company  from  the  Tramways 
Company  ;  but,  as  matter  of  fact,  the  expenses  of  obtaining 
the  Act  were  considerably  less  than  £17,000,  and  Mann 
and  Beattie  secured  a  large  profit  from  the  transaction. 
The  Act  itself  provided  that  the  capital  of  the  Tramways 
Company  should  be  expended  in  making  a  cable  tramway, 
the  only  other  expenditure  authorized  being  the  cost  of  pro- 
curing the  Act.  No  power  was  conferred  upon  the  company 
to  spend  any  of  its  assets,  except  for  the  purposes  of  the 

1  Society  of  Practical  Knowledge  v.  Abbott,  2  Beav.  559  ;  Mann  v. 
Edinburgh  Northern  Tramways   Co.,  68  L.   T.  Rep.  N.  8.  96 ;  In  re 
George  Newman   &  Co.,  1  Ch.  (1895)  674. 

2  68  L.  T.  Rep.  N.  s.  96. 


40     PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

Act.  It  was  not  within  the  power  of  the  company  to  per- 
mit Mann  and  Beattie  to  retain  any  surplus  after  discharge 
of  the  expenses  of  securing  the  passage  of  the  Act ;  and  the 
agreement  between  them  and  the  Cable  Company  was  only 
a  circuitous  way  of  taking  such  surplus  from  the  funds  of 
the  Tramways  Company.  It  was  held  in  the  House  of 
Lords  that  Mann  and  Beattie  were  liable  to  account  to  the 
company  for  their  profit,  and  that  they  were  not  relieved 
by  the  fact  that  their  agreement  with  the  Cable  Corpora- 
tion was  known  to  all  the  shareholders  of  the  Tramways 
Company,  and  had  been  ratified  by  the  directors.  No  ap- 
proval by  those  who  happened  to  be  directors  and  share- 
holders at  the  time,  it  was  held,  could  give  validity  to  it,  it 
being  ultra  vires  the  company. 


ACCOUNTABILITY   OF   PEOMOTEES   TO   COEPOEATION.        41 


CHAPTER  III. 

ACCOUNTABILITY    OF    PEOMOTEES    TO     THE    COEPOEATION    FOE 
PEOFITS,  GIFTS,   AND   COMMISSIONS. 

AETICLE  I.  —  Accountability  of  Promoters  for  Profits 
obtained  by  them  as  Vendors  of  the  Corporation. 

AETICLE  II. — Accountability  of  Promoters  for  Gifts 
and  Commissions. 

ARTICLE  I.  —  ACCOUNTABILITY  OF  PROMOTERS  FOR  PROFITS  OB- 
TAINED BY  THEM   AS  VENDORS    OF  THE    CORPORATION. 


§  42.  Right  of  corporation  to  claim 
benefit  of  purchase  made 
by  promoters  while  such. 

43.  Tyrrell  v.  Bank  of  London, 

10  H.  L.  C.  26. 

44.  Mere  fact  that  property  pur- 

chased by  promoters  while 
such  does  not  entitle  cor- 
poration to  benefit  of  pur- 
chase. 

45.  Benson  v.  Heathorn,  1  Y.  & 

C.  326. 

46.  Right  of  corporation  to  claim 

benefit  of  purchase  made 
by  promoter  before  he  be- 
came such. 

47.  In  re  Ambrose  Lake  Tin  and 

Copper  Mining  Co.,  14  Ch. 

D.  390. 

48.  Ladywell     Mining     Co.      v. 

Brooks,  35  Ch.  D.  400. 

49.  Colorable  transfer  of  property 

to  promoter  to  be  by  him 
sold  to  the  corporation. 

60.  Whaley  Bridge  Calico  Print- 

ing Co.  v.  Green,  5  Q.  B.  D. 
109. 

61.  Acts  and  declarations  of  pro- 

moter giving  corporation 
right  to  claim  benefit  of 
purchase  made  by  him. 

62.  Simons  v.  Vulcan  Oil  Co.,  61 

Penn.  202. 


§  53.    Burbank  v.  Dennis,  101  Cal. 
90. 

54.  Right  of  corporation  to  ben- 

efit of  optional  purchase 
made  by  promoter  before 
becoming  such. 

55.  Offer  by  promoter  to  corpo- 

ration entitling  it  to  benefit 
of  his  purchase. 

66.  Plaquemines    Tropical  Fruit 

Co.  v.  Buck,  52  N.  J.  Eq. 
219. 

67.  Pittsburg      Mining     Co.     v. 

Spooner,  74  Wise.  307. 

58.  Right  of  corporation  to  bene- 
fit of  optional  purchase 
made  by  third  persons  con- 
federating with  promoter. 

69.  Fountain  Spring  Park  Co.  v. 
Roberts,  92  Wise.  345. 

60.  Right  of  corporation  to  re- 

cover the  profit  made  by 
promoter  on  a  sale  of  his 
property  to  it.  Definition 
of  term  "profit." 

61.  Recovery  of  profit  when  prop- 

erty sold  is  a  commodity 
having  a  current  market 
price. 

62.  Recovery  of  profit  when  prop- 

erty sold  is  not  a  com- 
modity with  current  market 
price. 


42  PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

§  42.  Right  of  corporation  to  claim  benefit  of  purchase 
made  by  promoters  while  such.  —  A  promoter  who  sells  to 
the  corporation  he  promotes  property  which  he  purchased 
while  a  promoter,  and  which  at  the  time  of  his  purchase 
was  available  for  the  purposes  of  the  corporation,  is,  as 
a  rule,  liable  to  account  to  it  for  the  difference  between 
the  cost  and  the  sale  price,  unless  he  has,  prior  to  the  sale, 
disclosed  to  it  his  interest  and  the  price  which  he  paid. 
When  he  purchases,  he  is  in  a  fiduciary  relation  to  the 
projected  corporation;  he  is  in  a  position  akin  to  that 
of  an  agent,  and  is  subject  in  the  matter  to  similar  duties.1 
Although  not  in  fact  an  agent  to  buy  for  the  corporation, 
his  relation  to  it,  and  his  peculiar  means  of  knowledge 
as  to  its  needs,  make  it  incumbent  upon  him  not  to  take 
a  position  antagonistic  to  its  interests.  As  in  the  case 
of  an  agent,  he  will  not  be  permitted  to  abuse  his  influence 
or  to  betray  the  confidence  reposed  in  him.  It  makes 
no  difference  that  an  agent  was  not  directed  by  his  prin- 
cipal to  purchase.  If  he  has  by  means  of  his  position 
as  agent  acquired  knowledge  that  his  principal  desires 
to  buy  specific  property,  he  will  not  be  allowed  to  employ 
that  knowledge  to  obtain  a  profit  at  the  expense  of  his 
principal,  and  if  he  buys  the  property  and  then  resells 
it  to  his  principal  at  an  advance,  he  will  be  held  to  have 
bought  for  his  principal,  and  will  not,  without  the  prin- 
cipal's consent,  be  permitted  to  retain  any  profit.2  Under 
such  conditions  he  is  constructively  in  the  same  position 
as  an  agent  directly  instructed  to  purchase  for  his  prin- 
cipal. "  If  a  man  is  instructed  as  agent  for  another 
to  buy  property,  whatever  price  he  buys  it  for,  he  must 

1  Gover's  Case,  1  Ch.  D.   182;   Erlanger  v.  New  Sombrero  Phos- 
phate Co.,  3  App.  Gas.  1218  ;  Ladyioell  Mining  Co.  v.  Brooks,  35  Ch. 
D.  400  ;  South  Joplin  Land  Co.  v.  Case,  104  Mo.  572. 

2  Goiver  v.  Andrew,  59  Cal.  119;  Davis  v.  Hamlin,  108  111.  39. 


ACCOUNTABILITY  OF  PROMOTERS  TO  CORPORATION.    43 

hand  it  over  at  that  price  to  his  principal,  and  he  can- 
not as  between  himself  and  his  principal,  when  he 
bought  at  a  lower  price,  add  to  it  by  pretending  to  sell 
to  his  principal  that  which  he  has  already  bought  for  his 
principal."1 

§  43.  in  Tyrrell  v.  Bank  of  London,2  —  Read  was  the  owner 
of  an  option  to  buy  certain  properties.  Tyrrell  was  one 
of  the  promoters  of  the  company  and  acted  as  its  solicitor 
during  its  promotion  and  after  its  formation.  Prior  to 
the  actual  formation  of  the  company,  but  while  Tyrrell 
was  acting  as  promoter  and  solicitor,  he  entered  into  an 
agreement  with  Read  by  which  he  became  jointly  and 
equally  interested  with  him  in  the  option.  The  company, 
upon  its  organization,  agreed  to  treat  with  Read  for  the 
purchase  of  the  property,  and  committed  the  conduct  of 
the  treating  to  its  solicitor,  Tyrrell.  Ultimately,  it  pur- 
chased the  property  at  the  advice  of  Tyrrell,  who  carefully 
concealed  from  it  his  interest  in  the  property.  Held,  that 
he  must  account  to  the  company. 

§  44.  Mere  fact  that  property  purchased  by  promoters  -while 
such  does  not  entitle  corporation  to  benefit  of  purchase.  — 
The  mere  fact,  however,  that  the  property  which  the  pro- 
moter has  sold  to  the  corporation  was  purchased  by  him 
while  a  promoter,  cannot  in  all  cases  confer  on  the  cor- 
poration the  right  to  claim  the  benefit  of  the  promoter's 
purchase.  If  the  corporation  was  not  formed  to  acquire 
that  particular  property,  and  the  promoter  purchased  with- 
out any  intimation  or  assurance  that  the  corporation  would 
take  or  need  it,  and  not  as  a  speculation  from  which  he 
might  derive  secret  profits,  there  would  seem  to  be  no 
reason  for  holding  that  he  bought  as  a  constructive  agent, 

1  Cotton,  L.  J.,  in  Ladywell  Mining  Co.  v.  Brooks,  35  Ch.   D.   at 
p.  413;  Parker  v.  Nickerson,  112  Mass.  195. 
3  10  H.  L.  C.  26. 


44    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

or  that  the  corporation  was  entitled  to  the  benefit  of  his 
purchase.1  But  if,  in  selling  to  the  corporation,  he  con- 
cealed his  interest,  and  secured  a  secret  profit,  it  would 
be  difficult  to  escape  the  conclusion  that  when  he  pur- 
chased, he  did  in  fact  purchase  in  order  that  he  might 
unfairly  obtain  a  personal  benefit  at  the  expense  of  the 
corporation. 

§  45.  Thus  in  Benson  v.  Heathorn,2  —  the  defendant  being 
a  director  of  a  corporation  established  for  the  building, 
purchasing,  hiring,  and  employment  of  steam  vessels,  pur- 
chased a  vessel,  and  afterwards  sold  it,  at  an  advance, 
to  the  corporation  as  from  a  stranger.  In  ordering  him 
to  account  to  the  corporation,  Knight  Bruce,  V.  C.,  said : 
"  Under  these  circumstances,  is  it  possible  for  me,  what- 
ever may  have  been  the  secret  intentions  of  Mr.  Heathorn's 
mind  when  he  bought  the  vessel  —  is  it  possible  for  a 
judge  in  a  Court  of  Equity  to  hear  him  say  that  he 
bought  it  otherwise  than  as  agent  ?  I  find  it  utterly 
impossible  to  do  so  ;  his  own  mode  of  proceeding  has, 
in  my  opinion,  indelibly  and  inextricably  fixed  him 
with  the  character  of  agent  from  the  beginning  of  that 
transaction." 

§  46.  Right  of  corporation  to  claim  benefit  of  purchase  made 
by  promoter  before  he  became  such.  —  When  a  promoter  sells 
to  the  corporation  property  which  he  purchased  before  he  be- 
came a  promoter,  the  corporation,  as  a  rule,  cannot,  although 
he  fails  to  disclose  to  it  his  interest,  claim  the  benefit  of  his 
purchase.  Buying  for  himself  with  his  own  funds,  before 
any  steps  are  taken  to  promote  a  corporation,  he  is,  in 
making  the  purchase,  in  no  sense  a  trustee  or  agent  for 
the  corporation.  Neither  in  fact  nor  in  contemplation  of 
law  is  there  at  the  time  of  purchase  a  cestui  que  trust  or 

1  Sandy  River  R.  R.  Co.  v.  Slubbs,  77  Me.  595. 

2  1  Y.  &  C.  326. 


ACCOUNTABILITY   OF   PROMOTERS    TO   CORPORATION.        45 

principal  for  whom  it  is  his  duty  to  buy.  His  rights  in 
relation  to  the  proceeds  of  any  sale  he  may  make  of  the 
property  are  the  same  as  if  the  property  had  been  given  to 
or  inherited  by  him.  The  corporation  has  no  greater  right 
to  insist  on  having  the  property  at  the  price  at  which  he 
bought,  than  it  would  have  to  claim  the  property  for  noth- 
ing, in  case  he  had  acquired  it  as  a  gift.  He  may  be  re- 
sponsible in  damages  to  the  corporation  for  a  breach  of  his 
fiduciary  duty  to  it,  as  a  promoter,  to  disclose  his  interest 
in  the  property  upon  its  sale  to  the  corporation,1  and  it  is 
perhaps  a  debatable  question  whether,  when  he  has  failed 
to  disclose  his  interest,  he  is  not  liable  to  hand  over  to  the 
corporation  his  profit,  —  that  is  to  say,  the  difference  be- 
tween the  value  of  the  property  at  the  time  he  sold,  and 
the  price  which  he  received  ;  but  he  is  not  ordinarily  ac- 
countable to  the  corporation  for  the  difference  between 
what  he  paid  and  the  price  at  which  he  sold.2 

§  47.  In  re  Ambrose  Lake  Tin  &  Copper  Mining  Co.  —  The 
rule  stated  in  the  preceding  section  is  clearly  explained  in 
In  re  Ambrose  Lake  Tin  $•  Copper  Mining  Co?  In  this 

1  See  liability  of  promoters  in  damages  to  the  corporation,  infra. 

2  Ladywell   Mining    Co.  v.    Brooks,   35   Ch.  D.   400  ;  Erlanger  v. 
New  Sombrero  Phosphate   Co.,  3  App.   Cas.  1218,  per  Lord   Cairns; 
In  re  Ambrose  Lake   Tin  §•   Copper  Mining  Co.,  14  Ch.  D.  390;  In 
re  Cape  Breton  Co.,  29  Ch.  D.  795;  Dc.nsmore  Oil  Co.  v.  Densmore,  64 
Penn.  43;  Ely  v.  Hanford,  65  111.  267;  Higgim  v.  Lansingh,  154  111. 
301,  378;  Burbank  v.  Dennis,  101  Cal.  90  ;  In  re  The  Hess  Mfg.  Co., 
21  Out.  App.  66. 

In  Getty  v.  Devlin,  54  N.  Y.  403,  and  Ex-Mission  Land  Sf  Water 
Co.  v.  Flash,  97  Cal.  610,  expressions  may  be  found  supporting  a 
view  contrary  to  that  expressed  in  the  text ;  but  it  will  be  found  that 
in  these  cases  the  corporation  became  entitled  to  the  benefit  of  the 
original  purchase  by  reason  of  the  subsequent  acts  and  declarations  of 
the  purchaser  in  relation  to  the  property,  and  not  merely  because  the 
purchaser,  subsequent  to  his  purchase,  became  a  promoter  of  a  cor- 
poration and  sold  the  property  to  it. 

8  14  Cb.  D.  390. 


46  PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

case  officers  of  a  corporation  who  had  sold  to  it  a  mine 
which  they  had  purchased  before  they  became  officers, 
were  ordered  to  account  to  the  corporation  for  the  differ- 
ence between  the  cost  of  the  mine  to  them  and  the  price 
which  they  received  on  its  resale.  The  order  was  reversed, 
on  appeal. 

Cotton,  L.  J.,  said :  "  The  principle  of  the  order  must  be 
this,  that  the  company  are  at  liberty  to  treat  these  persons 
as  trustees  of  the  property  for  the  company,  and,  treating 
them  as  trustees,  to  allow  them  only  what  they  paid  for  the 
property,  and  if  they  got  anything  else  out  of  the  coffers  of 
the  company,  to  make  them  account  for  that.  Neither  on 
principle  nor  on  authority  can  that  be  maintained,  unless 
at  the  time  when  the  so-called  vendor  acquired  the  prop- 
erty he  either  acquired  it  for  the  company,  or  was  in  such 
a  position  of  fiduciary  relation  to  the  company  that  any 
purchase  made  by  him  of  property  available  for  the  com- 
pany must  be  considered  as  a  purchase  made  by  him  as  a 
trustee  for  the  company.  In  that  case,  what  the  Court  does 
is  to  go  back  to  the  original  purchase  made  by  the  person 
who  afterwards  purports  to  sell  to  the  company  at  an  ad- 
vanced price,  and  to  say,  '  This  was  already  the  company's  at 
the  price  which  you  originally  gave  for  it  when  you  were  a 
trustee  for  the  company.  That  price  you  are  entitled  to 
receive  out  of  the  coffers  of  the  company,  and  anything  else 
is  a  sum  paid  to  you  for  nothing,  which  you  are  not  entitled 
to  retain.' "  After  stating  that  when  the  original  purchase 
was  made,  the  purchasers  were  not  trustees  for  the  com- 
pany, that  the  suggestion  is  that  they  sold  to  the  com- 
pany, being  both  owners  of  the  mine  and  trustees  of  the 
company,  and  that  therefore  the  company,  not  seeking  to 
set  aside  the  transaction,  may  say,  "  We  will  take  this  at 
its  face  value,  and  make  you  account  for  the  difference," 
he  continues  :  — 


ACCOUNTABILITY  OF  PROMOTERS  TO  CORPORATION.   47 

"  How  can  that  be  done  ?  I  can  quite  understand  an 
action  to  set  aside  the  contract  altogether,  but  that  is  not 
the  course  adopted  by  the  company.  I  can  see  no  ground, 
either  on  principle  or  authority,  on  which  the  company  can 
say,  not  seeking  to  set  aside  the  contract,  '  We  will  hold 
you  as  passing  this  to  the  company,  not  because  you  origi- 
nally acquired  it  for  the  company,  but  because  you  entered 
into  a  contract  to  sell  to  the  company  which  is  not  binding, 
and  therefore  we  make  another  contract  to  take  it  from  you 
for  what  it  originally  cost  you,  making  you  account  for 
whatever  else,  under  that  invalid  contract,  you  stipulated 
should  be  paid  for  it.'  I  am  of  opinion  that  this  cannot 
be  maintained,  and  therefore  the  order  we  have  to  deal  with 
cannot  stand." 

§  48.  In  Lady-well  Mining  Co.  v.  Brooks,1  —  a  lease  of  a 
mine  was  purchased  by  four  persons  for  £5,000,  and  paid  for 
out  of  their  own  moneys.  At  the  time  of  the  purchase  they 
contemplated  the  formation  of  a  corporation  to  which  to 
sell  the  lease  of  the  mine.  About  two  months  afterwards, 
they  began  to  promote  a  corporation,  and  entered  into  a 
contract  with  a  trustee  for  the  intended  corporation  for  the 
sale  of  their  interest  in  the  mine  at  the  price  of  .£18,000. 
The  company  was  formed  with  three  of  the  four  purchasers 
as  directors,  and  the  sale  was  carried  out  by  them,  their  in- 
terest not  being  disclosed.  It  was  held  that  the  corpora- 
tion was  not  entitled  to  the  benefit  of  their  purchase,  and 
that  they  were  not  liable  to  refund  to  it  their  profits. 
*  "  The  question  is,"  said  Lopes,  L.  J.,  "  Did  Palin  and  his 
associates,  on  the  1st  of  February,  stand  in  a  fiduciary 
position  towards  this  company  that  was  thereafter  to  be 
formed,  —  or,  in  other  words,  were  they  then  acting  for  the 
company  about  to  be  formed  ?  If  they  were,  the  plaintiffs 
are  entitled  to  succeed.  Now  this  is  entirely  a  question  of 

1  35  Ch.  D.  400. 


48  PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

evidence,  and  the  Court  has  to  place  upon  the  evidence 
which  is  laid  before  it  its  proper  effect  and  meaning. 
The  evidence,  after  very  careful  consideration  of  it,  does 
not  satisfy  me  that  Palin  and  his  associates  were  acting  on 
the  1st  of  February  for  the  company  about  to  be  formed. 
According  to  my  view,  and  the  view  that  ought  to  be  drawn 
from  this  evidence,  they  bought  the  mine  themselves  and 
paid  for  it  out  of  their  own  pockets,  no  doubt  with  the  in- 
tention of  selling  to  a  company  thereafter  to  be  formed  ; 
but  there  is  nothing  to  show  that  they  were  on  the  1st  of 
February  acting  for  a  proposed  company.  No  person  is 
called  to  say  that  they  were  asked  to  take  shares  by  any  of 
the  vendors  because  they  were  forming  a  company.  There 
is  no  evidence  that,  in  any  shape  or  way,  they  stood  in  such 
a  relation  to  the  company  thereafter  to  be  formed  as  would 
entitle  that  company,  when  formed,  to  say, '  You  made  this 
contract  for  us,  —  it  is  our  contract,  and  we  can  only  be 
required  to  pay  the  price  which  you,  acting  as  our  agent, 
paid  for  it.'  There  is  no  evidence  that  can  properly  lead 
the  Court  to  such  a  conclusion." 

§  49.  Colorable  transfer  of  property  to  promoter,  to  be  by 
him  sold  to  the  corporation.  —  If  the  owner  of  property,  as  a 
part  of  a  scheme  to  sell  it  to  a  corporation  to  be  formed, 
nominally  conveys  the  title  to  another  for  a  price  stated, 
which  is  fictitious,  in  order  that  this  fictitious  price  may  be 
held  out  as  a  price  actually  paid,  and  the  corporation  thus 
induced  to  give  more  than  it  otherwise  would,  it  being 
secretly  agreed  that  the  real  owner  shall  have  the  avails 
of  the  sale,  and  pay  therefrom  to  his  associate  a  commis- 
sion ;  and  then  this  associate  promotes  a  corporation  to 
which  the  property  is  sold,  the  transfer  to  him,  being  a 
mere  sham,  is  not  to  be  regarded  as  a  purchase  by  him  be- 
fore he  began  to  promote,  and  the  corporation  may  recover 
from  him  his  secret  commission  or  profit;  but  it  cannot 


ACCOUNTABILITY   OF   PKOMOTEKS   TO   COKPORATION.        49 

recover  from  the  real  owner,  although  he  joins  in  promot- 
ing the  corporation,  the  difference  between  what  he  paid  for 
the  property  and  what  he  got  on  the  sale  to  the  corporation.1 
§  50.  Thus,  in  Whaley  Bridge  Calico  Printing  Company  v. 
Green,2  —  Robert  E.  Green  was  the  owner  of  certain  calico 
printing  works  which  he  had  purchased  for  the  sum  of 
£15,000.  Shortly  after  the  purchase,  he  pretended  to 
sell  the  works  to  his  manager,  John  Smith,  for  £20,000, 
by  a  contract  which  the  jury  found  was  a  sham  contract, 
and  which  was  intended  to  be  used  for  the  purpose  of 
negotiating  with  a  corporation  to  be  formed  to  purchase 
the  works.  It  was  secretly  agreed  between  Green  and 
Smith,  that  the  latter  should  have  X 3,000  out  of  the  pur- 
chase money  to  be  paid  for  the  property  by  the  corpora- 
tion. The  plaintiff  corporation  was  then  formed  by  Green 
and  Smith,  and  the  works  transferred  to  it  for  £20,000. 
The  board  of  directors  consisted  of  their  nominees,  "  and 
in  order  to  make  the  purchase  run  more  smoothly,  a 
sham  contract  of  purchase  was  flashed  before  the  eyes 
of  the  directors  as  if  it  were  a  real  contract  by  both 
Smith  and  Green."  Smith  had  a  right  to  agree  with 
Green  that  he  should  be  remunerated  to  the  extent  of 
£3,000,  provided  such  agreement  was  made  with  the 
knowledge  and  assent  of  the  corporation  ;  but  the  cor- 
poration had  a  clear  right,  it  was  held,  to  treat  all  profit 
made  by  Smith  out  of  such  a  transaction  as  profit 
belonging  to  it.  The  claim  put  forward  by  the  cor- 
poration to  have  refunded  to  it  the  £5,000,  the  differ- 
ence between  the  £20,000  purchase  money,  and  the  price 
at  which  Green  himself  had  bought,  was  not  sustained.3 

1  The  real  owner  might  be,  however,  by  reason  of  his  participation 
in  the  fraud,  liable  in  damages  to  the  corporation. 

2  5  Q.  B.  D.  109. 

8  See  also  In  re    Westmoreland   Green  Sf  Blue  Slate  Co.,  2  Ch. 

4 


50  PKOMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

§  51.  Acts  and  declarations  of  promoter  giving  corporation 
right  to  claim  benefit  of  his  purchase.  —  One  who  has  pur- 
chased and  paid  for  property,  prior  to  any  steps  to  pro- 
mote a  company  to  take  it  off  his  hands,  may,  by  his 
acts  and  declarations  in  his  subsequent  relation  of 
promoter  of  the  company,  make  it  his  duty  to  treat 
the  property  as  property  bought  for  the  company,  and 
not  for  himself  alone.  While  such  duty  may  not  have 
been  incumbent  upon  him  in  making  the  purchase,  it 
is  open  to  him  to  assume  it  if  he  sees  fit,  and  if  he  vol- 
untarily takes  that  position,  he  will  be  held  to  it.  He 
assumes  the  duty  when  he  declares  that  he  bought  for 
the  company,  and  persons  are  induced  to  join  the  cor- 
porate enterprise  on  the  faith  of  his  declaration.  The 
company  is  then  entitled  to  the  benefit  of  his  purchase. 
The  same  result  follows  if  subscribers  come  in  on  his 
assurance  that  the  company  is  to  acquire  the  property 
at  its  cost.  In  these  cases,  he  is  accountable  to  the 
company  for  any  secret  profit  he  may  obtain.1 

§  52.  in  Simons  v.  Vulcan  Oil  Co.,2  — the  defendants  pur- 
chased oil  lands  with  a  view  to  selling  them  to  a  corpora- 
tion which  they  then  had  it  in  their  minds  to  form. 

(1893)  612,  where  a  transfer  of  an  interest  in  property  was  held  to  be 
merely  a  device  to  evade  the  law  as  to  promotion  money. 

1  In  Ladywell  Mining  Co.  v.  Brooks,  35  Ch.  D.  at  p.  411,  Cotton, 
L.  J.,  puts  this  case,  by  way  of  illustration,  in  which  the  benefit  of  a 
purchase  of  property,  to  be  sold  to  a  projected  company,  might  be 
claimed  by  the  company  when  formed  :     "  If  in  fact  those  who  pur- 
chased this  mine  had  before  the  time  they  made  the  purchase  invited 
the  public  to  come  in  and  join  the  company  to  work  this  mine,  then  it 
may  well  be  that  if  the  company  was  formed,  and  they  had  handed 
over  the  mine  to  the  company,  the  shareholders  would  have  been  en- 
titled to  say,  '  As  you  have  formed  a  company  to  work  this  mine,  you 
must  admit  that  the  purchase  was  not  made  in  your  individual  ca- 
pacity, but  was  made  for  the  purpose  of  offering  it  to  the  public  if 
they  came  in  and  formed  a  company  to  work  it.'  " 

2  61  Penn.  202. 


ACCOUNTABILITY   OF   PROMOTEES   TO   CORPORATION.        51 

The  title  was  taken  in  the  name  of  the  defendant  Simons, 
and  in  the  deeds  the  total  consideration  was  expressed 
to  be  $81,000,  when  in  fact  it  was  but  $10,000.  The  de- 
fendants, with  others,  then  organized  the  Vulcan  Oil  Com- 
pany, and  the  property  was  turned  in  to  it  for  $81,000, 
on  their  representations,  orally  and  by  prospectuses, 
that  they  had  purchased  it  for  the  company,  and  were 
conveying  it  to  the  company  at  its  original  cost.  They 
were  held  liable  to  account  to  the  company  for  the  dif- 
ference between  the  price  at  which  they  bought  and  the 
price  at  which  they  sold.  The  case  turned  on  the  ques- 
tion whether  or  not  it  was  the  duty  of  the  defendants  to 
treat  the  property  as  bought  for  the  company.  This 
was  left  to  the  jury  to  decide  as  a  question  of  fact,  and 
was  decided  in  the  affirmative.  The  learned  trial  judge 
(Judge  Hare),  among  other  things,  instructed  the  jury 
as  follows :  — 

"  In  order  to  judge  whether  this  title  was  acquired 
by  the  defendants  for  themselves,  or  on  behalf  of  the 
corporation,  we  must  turn  from  the  deeds  (of  the  prop- 
erty) to  the  acts  and  declarations  of  the  parties  in  the 
relation  in  which  they  stand  to  the  corporation,  and  see 
whether  looking  at  what  they  said  and  what  they  did, 
it  does  or  does  not  appear  that  they  bought  the  land  in 
a  way  rendering  it  their  duty  to  treat  it  as  land  bought 
for  the  company,  and  therefore  to  be  transferred  to  the 
company  at  the  price  paid  to  the  original  owners,  unless 
the  contrary  was  agreed  upon  with  a  full  knowledge  of 
all  the  circumstances."  (Evidence  recited.)  "  This  is 
the  evidence  that  these  lands  were  in  fact  purchased 
by  the  defendants,  ostensibly  for  the  Vulcan  Oil  Company ; 
and  if  they  represented  this  to  be  so  ;  if  they  held  it  out 
to  the  world  as  the  true  state  of  the  case,  and  induced 
persons  to  subscribe  on  the  faith  of  their  declarations ; 


52  PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

if  they  so  dealt  with  the  company  and  obtained  their 
price,  —  what  their  real  purpose  or  object  was  is  immaterial, 
because  it  is  impossible  to  read  the  secret  purposes  of 
men,  and  in  dealing  with  them  we  can  only  look  at  what 
they  avow.  It  is  possible  that  their  secret  and  avowed 
purposes  were  at  variance  with  each  other;  their  secret 
purpose  was  to  buy  the  land  for  themselves  as  their  own 
property,  with  a  view  of  transferring  it  to  the  company 
at  an  advance;  their  avowed  purpose,  to  hold  it  as  the 
property  of  the  company  with  a  view  of  obtaining  sub- 
scribers for  the  stock;  but  unless  this  secret  purpose 
was  made  known,  it  ought  not  to  avail  against  the  pur- 
pose which  was  proclaimed  and  by  which  they  were 
believed  by  others  to  be  actuated." 

§53.  in  Burbank  v.  Dennis,1 — the  defendant  Sanborn 
purchased  certain  lands  and  procured  contracts  for  the  pur- 
chase of  other  lands,  with  a  view  to  reap  a  profit  by  bring- 
ing about  the  formation  of  a  corporation  which  should  buy 
the  lands  at  an  advance  over  the  prices  paid  or  contracted 
to  be  paid  by  him.  In  the  negotiations  as  to  some  of  the 
lands  in  question,  the  defendant  Dennis  acted  as  an  agent 
for  Sanborn,  and  also  for  the  owners.  It  was  the  intention 
of  Sanborn  to  induce  Eastern  capitalists  to  become  sub- 
scribers for  the  stock  of  the  contemplated  corporation  ;  but 
Dennis  having  suggested  to  him  that  home  capitalists 
would  interest  themselves  in  the  venture,  attention  was 
turned  toward  the  latter  class,  and  Dennis,  with  the  co-op- 
eration of  Sanborn,  had  negotiations  with  various  persons, 
which  culminated  in  a  written  agreement.  In  this  agree- 
ment, —  which  was  drafted  by  Sanborn,  —  Dennis,  Sanborn, 
and  the  prospective  shareholders  of  the  proposed  corpora- 
tion, in  consideration  of  one  dollar  received  each  from  the 
other,  agreed  to  purchase  the  lands  for  $537,000,  and  forth- 

1  101  Cal.  90. 


ACCOUNTABILITY   OF   PROMOTERS   TO   CORPORATION.        53 

with  to  organize  a  corporation  through  which  to  carry  out 
the  enterprise.  The  interest  of  each  party  to  the  instru- 
ment was  specified,  Sanborn  taking  one  quarter,  and  Dennis 
one-fifth.  When  this  instrument  was  signed,  Sanborn  and 
Dennis  agreed  with  their  associates  that  all  lands  they  then 
had,  or  had  a  right  under  their  contracts  to  acquire,  should 
be  turned  in  to  the  corporation  when  formed,  at  the  prices 
they  had  paid  or  agreed  to  pay.  The  corporation  was  then 
organized,  and  on  the  representation  of  the  defendants  that 
$200,000  would  be  required  to  make  first  payments  and  to 
keep  alive  Sanborn's  options  and  contracts,  that  sum  was 
paid  in  by  the  subscribers  and  turned  over  to  Dennis  to 
apply  in  the  manner  stated.  Subsequently,  Dennis  reported 
that  he  had  paid  $193,662.62  to  Sanborn  on  account  of  the 
purchase  price  of  the  lands.  In  truth,  but  $97,686.62  was 
required  and  was  applied  to  pay  the  cost  price ;  and  the 
balance  was  retained  by  the  defendants  as  a  secret  profit. 
It  was  held  that,  as  promoters  of  the  corporation,  they  must, 
on  the  facts  stated,  account  to  the  corporation  for  this 
secret  profit.  Sanborn  purchased  the  lands,  either  abso- 
lutely or  conditionally,  prior  to  his  becoming  a  promoter, 
and,  under  ordinary  conditions,  the  corporation  would  not 
have  been  entitled  to  the  benefit  of  his  purchases,  but  by 
his  declarations,  on  which  the  corporation  acted,  he  made 
himself  a  trustee  for  it,  as  of  the  time  when  he  bought.1 

§  54.  Right  of  corporation  to  benefit  of  optional  purchase 
made  by  promoter  before  becoming  such.  —  The  general 
rule  laid  down  that  a  promoter  who  obtains  a  secret  profit 

1  Ex-Mission  Land  Sf  Water  Co.,  97  Cal.  610,  is,  on  the  facts 
therein  found,  within  the  principle  on  which  Burbank  v.  Dennis  and 
Simons  v.  Vulcan  Oil  Co.  were  decided,  although  the  Court  seemed  to 
think  that  promoter  vendors  of  a  corporation  are  liable  to  account  for 
secret  profits  on  a  sale  of  property  to  the  corporation,  whether  they 
acquired  the  property  prior  or  subsequent  to  becoming  promoters. 
For  a  statement  of  the  facts  in  this  case,  see  Sect.  8. 


54  PROMOTERS   AND   PROMOTION    OF   CORPORATIONS. 

on  the  sale  by  him  of  property  which  he  acquired  before  he 
began  to  promote  is  not  accountable  for  the  difference  be- 
tween what  he  paid  and  what  he  received,  is  settled  when 
the  purchase  is  outright  or  absolute.  There  is  some  dif- 
ference of  opinion  as  to  its  application  when  a  mere  option 
to  buy  is  secured,  which  is  to  be  exercised  only  in  the  event 
of  a  company  being  formed  and  capitalized  to  purchase  the 
property  from  the  holder  of  the  option.  The  opposing 
views  are  set  forth  with  great  clearness  in  Governs  Case,1 
in  which  the  circumstances  were,  in  the  language  of  one  of 
the  judges,  as  follows  :  — 

"  Mr.  Skoines  was  the  patentee  of  an  invention  relating 
to  gas-lighting.  Mr.  Mappin  appears  to  have  thought  that 
it  was  a  thing  which  he  could  sell  at  a  very  high  price,  to  a 
joint-stock  company  which  he  might  be  able  to  form  for  the 
purpose  of  buying  and  working  the  patent.  He  thereupon 
bargains  with  Mr.  Skoines,  and  in  consideration  of  £1,000 
paid  down,  he  obtains  from  Skoines  a  contract  binding  the 
latter,  for  a  certain  further  price  in  money  and  paid-up 
shares  in  a  company  to  be  formed,  to  convey  his  patent 
right.  If  Mappin  did  not  succeed,  within  a  certain  time,  in 
forming  the  company  and  obtaining  for  Skoines  the  further 
money  and  the  shares,  Skoines  was  to  be  released  from  his 
obligation,  and  he  would  retain  the  .£1,000  and  the  patent." 
Subsequently,  Mappin  promoted  and  became  a  director  of  a 
company  which  purchased  the  patent,  and  the  agreement 
between  Skoines  and  himself  was  executed. 

James,  L.  J.,  Bramwell,  B.,  and  Brett,  J.,  were  of  opinion 
that  Mappin  was  not  a  promoter  when  the  agreement  was 
made,  and  that  the  company  was  not  entitled  to  the  benefit 
of  it.  James,  L.  J.,  said :  — 

"  At  the  time  when  this  agreement  was  made,  there  was 
no  company  in  existence,  and  no  promoter,  trustee,  or 

1  1  Ch.  D.  182. 


ACCOUNTABILITY   OF   PROMOTERS   TO   CORPORATION.        55 

director  ;  the  company  had  not  even  an  inchoate  existence 
except  in  the  brain  of  Mappin ;  and  the  utmost  that  could 
be  said  of  Mappin  was  that  he  was  a  projector  of  a  com- 
pany which  he  intended  and  had  agreed  to  promote.  Hav- 
ing acquired  this  equitable  right  in  or  to  the  patent  —  this 
dominion  over  it  for  his  own  purpose  and  benefit  —  having 
bought  what  he  did  buy  of  Skoines  for  the  lowest  price  he 
could  get  the  latter  to  accept,  with  the  view  to  sell  it  at  the 
highest  price  which  he  could  get,  he  did  what,  it  appears  to 
me,  he  lawfully  and  rightfully  might  do  —  he  advertised 
his  wares  to  the  public  in  the  following  manner.  In  sub- 
stance, he  says  :  '  I  have  an  article  to  dispose  of ;  I  am  will- 
ing to  allow  persons  to  become  partners  and  shareholders 
with  me  on  the  following  terms  and  conditions.'  He  had  a 
right  to  prescribe  his  own  terms  and  conditions  like  any 
other  vendor  with  any  other  purchaser.  The  way  in  which 
he  made  his  offer  was  in  the  usual  way,  viz. :  he  entered 
into  a  provisional  contract  with  a  person  on  behalf  of  the 
intended  company.  The  making  of  that  provisional  con- 
tract was,  in  my  opinion,  the  first  period  of  time  at  which 
it  could  be  said  that  the  company  had  even  an  inchoate  ex- 
istence, and  it  was  from  and  after  the  making  of  that  con- 
tract that  any  fiduciary  or  other  relation  between  Mappin 
and  the  company  began.  In  the  making  of  that  contract, 
in  presenting  his  own  terms  and  conditions,  he  was,  accord- 
ing to  my  judgment,  in  the  position  of  any  ordinary  vendor 
with  any  ordinary  purchaser.  Everything  anterior  to  that 
was  a  matter  relating  to  himself  and  to  his  own  title  as 
vendor.  It  is  surely  open  to  any  man,  in  point  of  law,  to  sell 
his  property  to  a  joint-stock  company,  and  to  invite  persons 
to  form  themselves  into  a  joint-stock  company  to  purchase 
from  him,  just  as  it  is  open  to  any  man  to  sell  to  any  per- 
sons in  the  world  the  right  to  become  his  partners  in  any 
property  or  undertaking.  Until  the  formation  of  the  part- 


56  PROMOTERS  AND   PROMOTION   OF  CORPORATIONS. 

nership  he  is  simply  a  vendor  of  the  wares ;  he  may  ask 
what  price  he  likes,  and  obtain  what  price  he  can,  and  he  is 
under  no  obligation  whatever  to  say  what  price  he  gave,  or 
has  to  give,  for  them  in  order  to  complete  his  title  to  the 
goods.1  I  really  arn  at  a  loss  to  understand  on  what  prin- 
ciples it  can  be  said  that  Mappin's  contract  with  Skoines 
was  a  contract  by  the  company  or  by  any  promoter,  trustee, 
or  director  of  the  company.  It  is  conceded  that  if  he  had 
bought  the  patent  and  paid  down  the  price  in  money,  or 
contracted  to  pay  down  the  price  in  money,  he  would  have 
been  under  no  obligation  to  disclose  his  previous  bargains 
or  contracts,  though  he  would  have  been  obliged  to  show  a 
good  title  to  and  to  make  a  good  conveyance  of  the  thing 
which  he  proposed  to  sell.  And  I  cannot  draw  any  distinc- 
tion between  a  legal  right  and  an  equitable  right  —  between 
a  conditional  right  and  an  absolute  right  —  between  a  de- 
feasible right  and  an  indefeasible  right ;  all  that  was  still 
matters  of  title,  and  his  obligation  in  any  case  would  have 
been  the  same  to  make  a  valid  conveyance  at  the  proper 
time  of  the  thing  which  he  undertook  to  convey.  It  is 
said,  however,  that  when  the  bargain  with  Skoines  is  looked 
at,  it  contains  stipulations  about  the  forming  of  the  com- 

1  This  was  subsequently  qualified  by  Lord  Justice  James  in  New 
Sombrero  Co.  v.  Erlanger,  5  Ch.  D.  118,  by  the  explanation  that  if  he 
deals  with  a  company  as  a  promoter  he  must  act  fairly  :  — 

"  In  this  case  the  Vice-Chancellor  appears  to  have  proceeded  to  a 
great  extent  upon  what  was  supposed  to  have  been  said  in  Gover's  Case. 
Now  I  adhere  entirely  to  what  I  said  in  Gover's  Case,  that  is  to  say,  it 
is  quite  open  to  a  man  to  buy  property  at  any  price  he  likes,  with  the 
view  or  in  the  hope  of  selling  that  property  to  any  company  that  he 
can  get  to  buy  it,  if  that  is  the  mode  in  which  he  intends  to  dispose 
of  it.  A  man  may  buy  at  any  price  and  may  sell  at  any  price  that  he 
can  get  fairly  for  it.  But  that  has  nothing  whatever,  as  it  appears  to 
me,  to  do  with  the  question  in  this  case,  which  is  whether  a  man  who 
has  so  bought  at  a  low  price  has  obtained  a  higher  price,  fairly  and 
properly,  in  accordance  with  the  view  which  the  Court  of  Equity  takes 
of  such  transactions." 


ACCOUNTABILITY    OF   PROMOTERS   TO   CORPORATION.        57 

pany  and  the  constitution  of  the  company  and  the  shares  of 
the  company.  I  cannot  myself  see  that  the  Court  has,  for 
this  purpose,  any  right  to  read  these  stipulations.  They 
were  stipulations  between  Mappin  and  Skoines  alone,  and 
obligations  as  between  them.  Even  if  they  were  stipula- 
tions by  Mappin  to  do  something  wrong  in  the  company  or 
to  the  company,  this  might  be  evidence  of  that  wrong,  and 
proper  redress  might  be  given  for  that  wrong  as  a  substan- 
tive ground  for  complaint.  But  ...  no  impropriety  in  the 
contract  can  make  it  the  contract  of  the  company,  or  the 
contract  of  a  promoter,  trustee,  or  director  of  a  company, 
when  at  the  date  of  the  contract  there  was  no  company,  no 
promoter,  no  trustee,  no  director.  The  character  of  the 
contract  cannot  operate  as  a  transformation  of  the  contract- 
ing parties." 

Lord  Justice  Mellish  expressed  the  following  view : 
"  I  agree  that  if  the  contract  between  Skoines  and 
Mappin  is  to  be  looked  at  as  an  unconditional  contract  for 
the  sale  of  the  patent  from  Skoines  to  Mappin,  the  com- 
pany had  no  interest  in  the  contract,  and  were  not  entitled 
to  have  its  contents  disclosed  to  them.  The  contract,  how- 
ever, between  Skoines  and  Mappin  was  a  contract,  as  it 
appears  to  me,  upon  the  condition  that  Mappin  should  pro- 
cure the  patent  to  be  sold  to  a  company  formed  for  the 
purpose  of  working  the  patent,  and  if  such  sale  was  effected, 
£64,000,  partly  in  money  and  partly  in  shares,  was  to  be 
given  to  Skoines,  and  the  residue  of  the  price,  whether 
money  or  shares,  was  to  be  retained  by  Mappin.  Now, 
when  the  company  became  the  purchaser  of  the  patent, 
that  is  to  say,  when  the  directors,  after  the  formation  of 
the  company,  adopted  the  contract  made  by  Mappin  and 
Wright,  Mappin  was  both  a  promoter  and  director  of  the 
company.  The  purchase  of  the  patent  by  the  company, 
who  were  the  only  company  then  in  existence  formed  for 


58  PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

the  working  of  the  patent,  enabled  him  without  the  knowl- 
edge of  the  company  to  fulfil  his  contract  with  Skoines,  and 
to  earn  an  enormous  profit.  It  seems  to  me  that  there  are 
grounds  for  contending  that  under  these  circumstances 
Mappin  ought  not  to  be  considered  as  the  owner  of  the 
patent,  but  only  as  a  person  who  by  a  contract  with  the 
owner  of  the  patent  had  the  disposal  of  the  patent,  and  in 
that  case,  according  to  the  decision  of  the  House  of  Lords 
in  the  Imperial  Mercantile  Credit  Association  v.  Coleman? 
he  was  bound  to  communicate  his  contract  with  Skoines  to 
the  company,  and  as  he  did  not  do  so,  the  company  were 
entitled  to  the  benefit  of  that  contract."  2 


1  L.  K.  6  H.  L.  189. 

2  Governs  Case  was  an  application  by  a  shareholder  to  have  her 
name  removed  from  the  list  of  shareholders  in  a  joint-stock  company, 
on  the  ground  that  the  prospectus  did  not  contain  the  date  of  and  the 
parties  to  the  contract  between  Skoines  and  Mappin  referred  to  in  the 
text.     The  application  was  based  on  a  provision  in  the  Companies  Act 
that  every  prospectus  of  a  company  shall  specify  the  dates  and  the 
names  of  the  parties  to  any  contract  entered  into  by  the  company,  or 
the  promoters,  directors,  or  trustees  thereof,  before  the  issue  of  such 
prospectus;   and  that  any  prospectus  not  specifying  the  same  shall  be 
deemed  fraudulent  on  the  part  of  the  promoters,  directors,  and  officers 
of  the  company  knowingly  issuing  the  same,  as  regards  any  person 
taking  shares  in  the  company  on  the  faith  of  such  prospectus,  unless  he 
shall  have  had  notice  of  such  contract.    It  was  held  that  if  the  omission 
to  specify  the  contract  in  question  was  within  the  Act,  the  relief  to 
which  the  shareholder  was   entitled   was  a  personal  remedy  against 
those  who  had  issued  the  prospectus,  and  not  the  relief  to  have  her 
name  removed  from  the  list  of  shareholders.     This  was  sufficient  to 
dispose  of  the  appeal,  but  two  of  the  four  judges  also  held  that  the 
contract  in  question  had  not  been  entered  into  by  a  person  who  was 
at  the  date  thereof  a  promoter,  director,  or  trustee  of  the  company, 
and  that  consequently  it  was  unnecessary  to  mention  it  in  the  pro- 
spectus ;    from  this  conclusion  the  other  two  judges  dissented. 

In  this  aspect  of  the  case,  it  was  material  to  determine  whether 
or  not,  under  the  general  law,  Mappin  was  a  promoter  at  the  time 
he  entered  into  the  contract  in  question,  and  whether  or  not  the  com- 
pany was  entitled  to  the  benefit  of  the  contract,  as  touching  the  ques- 


ACCOUNTABILITY  OF  PROMOTERS  TO  CORPORATION.   59 

§  55.  Offer  by  promoter  to  corporation  entitling  it  to  benefit 
of  his  purchase.  —  It  is  clear  that  if  one  who  has  acquired 
aii  option  to  purchase  property  subsequently  promotes  a 
company,  and,  instead  of  contracting  in  his  own  name  to 
sell  the  property  to  the  company  or  inviting  the  company 
to  become  shareholders  in  the  property  itself,  invites  them 
expressly  or  impliedly  to  become  shareholders  with  him  in 
the  option,  or  to  join  with  him  on  terms  of  equality  in  pur- 
chasing the  property  from  the  owner  on  the  best  obtainable 
terms,  and  they  accept  that  invitation,  then  by  the  terms  of 
his  offer,  and  by  their  acceptance  of  that  offer,  he  makes 
himself  their  agent,  as  from  the  date  of  the  option,  and  any 
bye  or  collateral  contract  made  for  his  own  benefit  is  a 
contract  by  a  trustee  for  the  company,1  and  any  sum  which 
is  secretly  taken  from  the  company,  in  excess  of  the  real 
cost  of  the  property,  belongs  to  it,  and  must  be  returned.2 

§  56.  In  Plaquemines  Tropical  Fruit  Co.  v.  Buck,3  —  the 
defendant  Buck  secured  from  White  an  option  for  the  pur- 

tion  of  Mappin's  duty  under  the  statute  to  disclose  the  contract.  The 
case  is,  therefore,  of  value  in  connection  with  the  point  considered  in 
the  text. 

The  view  taken  by  Lord  Justice  James  was  quoted  with  approval 
in  the  opinion  of  Green,  V.  C.,  in  Plaquemines  Tropical  Fruit  Co.  v. 
Buck,  52  N.  J.  Eq.  219,  while  that  advanced  by  Lord  Justice  Hellish 
appears  to  have  been  adopted  by  Pitney,  V.  C.,  in  Woodbury  Heights 
Land  Co.  v.  Londenslager  (N.  J.  1896),  35  At.  Rep.  436.  See  Dorris 
v.  French,  4  Hun,  292;  South  Joplin  Land  Co.  v.  Case,  104  Mo.  572. 

1  James,  L.  J.,  in  Goner's  Case,  1  Ch.  D.  at  p.  188. 

2  It  has  been  suggested   that  this  result  should  follow  in  a  case 
where  nothing  has  been  paid  on  the  option,  and  there  is  no  obligation 
to  purchase.     There  can  be  no  application  here,  it  is  said,  of  the 
equitable  notion  that  in  cases  of  executory  contracts  for  the  purchase 
and  sale  of  land,  the  title  is,  in  equity,  to  be  treated  as  being  in  the 
vendee,  and  the   purchase  price  as  a  debt  due  the  vendor.     Pitkin, 
V.  C.,  in  Woodbury  Heights  Land  Co.  v.  Londenslager  (N.  J.  1896),  35 
At.  Rep.  436. 

8  52  N.  J.  Eq.  219. 


60  PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

chase  of  certain  lands  at  the  price  of  $25,000,  to  be  paid 
$5,000  in  cash,  $10,000  in  three  months,  and  $10,000  in 
shares  of  the  stock  of  a  corporation  to  be  formed  for  the 
development  of  the  lands.  Buck  then  became  the  sole  pro- 
moter of  the  intended  corporation ;  but  at  no  time,  either 
before  or  after  the  corporation  was  formed,  did  he  disclose 
to  it  the  fact  that  he  had  entered  into  the  contract  referred 
to  with  White.  On  the  contrary,  in  a  prospectus  prepared 
and  issued  by  him,  White  was  spoken  of  as  the  grantor  in 
the  proposed  sale  of  the  lands  in  question  to  the  corporation. 
At  a  meeting  of  the  stockholders,  Buck  being  present,  a 
resolution  was  passed  that  the  directors  purchase  the  lands 
from  White  for  $150,000,  payable,  $120,000  in  shares  of 
stock  of  the  corporation  at  par,  $10,000  in  cash,  and  the 
balance,  $20,000,  by  the  corporation's  notes  secured  by  a 
mortgage  on  the  lands.  Certificates  in  blank  for  12,000 
shares  were  then  delivered  to  Buck  to  effect  the  purchase. 
But  White  refused  to  carry  out  his  contract  with  Buck, 
who  thereupon  brought  suit  for  specific  performance.  This 
led  to  an  agreement  by  which  White  was  to  convey  four 
thousand  acres  more  than  was  originally  stipulated,  reserv- 
ing the  right  for  one  year  to  cut  willows  and  to  clear  the 
land,  and  was  to  receive  $27,000  instead  of  $25,000.  This 
agreement  was  carried  out  by  a  conveyance  of  the  lands 
from  White  to  Louque,  the  attorney  of  Buck,  Louque  giving 
the  required  note  for  $20,000  and  mortgage.  Louque  then 
conveyed  the  lands  to  the  corporation  subject  to  the  mort- 
gage. Buck  paid  White  $5,000  in  cash  and  transferred  to 
him  700  shares  of  stock.  White  then  gave  up  to  Buck  one 
of  the  notes  referred  to  for  $5,000,  and  Buck  turned  it  over 
to  a  person  who  had  assisted  him  in  his  bargaining.  The 
balance  of  the  12,000  shares  Buck  retained,  distributing 
part  among  the  other  defendants,  who  were  directors  and 
officers  of  the  corporation.  On  a  bill  brought  by  the  cor- 


ACCOUNTABILITY   OF  PKOMOTEKS   TO   CORPORATION.        61 

poration  against  the  defendants  to  compel  the  surrender  for 
cancellation  of  the  shares  of  stock  thus  obtained  by  them, 
the  foregoing  facts  having  been  shown  by  affidavits,  it  was 
ordered  that  an  injunction  should  issue  to  restrain  the  de- 
fendants from  parting  with  the  stock  or  voting  thereon, 
until  the  final  hearing  of  the  cause.  The  Vice-Chancellor, 
taking  the  view  that  "  no  rights,  legal  or  equitable,  arise  in 
favor  of  a  corporation  in  respect  of  transactions,  whether 
complete  or  inchoate,  merely  because  entered  into  in  con- 
templation of  the  creation  of  such  corporation,"  held  that, 
on  the  facts  shown,  Buck  must  be  considered  as  having 
made  the  contract  with  White,  not  for  himself,  but  on 
account  of  the  corporation,  and  could  not  be  permitted  to 
retain  any  increase  in  the  price.  The  fact  that  part  of  the 
consideration  to  be  paid  White  was,  by  the  terms  of  the 
contract,  to  be  paid  in  stock  of  the  proposed  corporation, 
was  considered  by  the  Vice-Chancellor,  while  not  conclu- 
sive, as  important  in  determining  the  question  whether  the 
purchase  was  made  for  the  corporation. 

§57.  In  Pittsburg  Mining  Co.  v.  Spooner,1  —  the  defend- 
ants procured  an  option  to  purchase  certain  mining  rights 
for  $20,000.  They  then  proceeded  to  obtain  subscriptions 
for  the  shares  of  stock  of  a  proposed  company  which  was  to 
be  formed  to  purchase  the  mining  rights.  They  represented 
to  subscribers  that  the  price  demanded  by  the  owners  of 
the  mining  rights  was  $90,000,  and  that  the  property  could 
not  be  bought  for  less  ;  that  they,  the  defendants,  were 
themselves  desirous  of  purchasing,  but  were  unable  to  pay 
so  much  money,  and  had  therefore  determined  to  organize 
a  corporation  to  make  the  purchase  ;  that  they  would  be- 
come subscribers  for  stock  to  the  extent  of  their  ability  ; 
that  there  was  no  speculation  in  the  purchase  price ; 
that  they  were  making  nothing  out  of  it  —  not  even  their 

1  74  Wise.  307. 


62  PROMOTERS  AND   PROMOTION   OF   CORPORATIONS. 

expenses,  unless  the  corporation,  when  formed,  should 
see  fit  to  reimburse  them  —  except  what  all  stockholders 
would  make  alike,  through  the  mining  operations  to  be  car- 
ried on  by  the  corporation  ;  and  that  $100,000  was  required 
in  the  enterprise,  $90,000  for  the  purchase  of  the  mining 
rights  from  the  owners  and  $10,000  to  work  the  mines. 

The  defendants  then  caused  a  subscription  paper  to  be 
drawn  up,  by  the  terms  of  which  subscribers  agreed  with 
the  defendant  Main,  who  was  described  as  the  owner  of 
the  mining  rights,  to  take  the  number  of  shares  in  the 
Pittsburg  Mining  Company,  "  proposed  to  be  formed,"  set 
opposite  their  respective  names,  and  to  pay  for  the  same 
$2.50  per  share  as  soon  as  the  company  was  incorporated. 
The  capital  of  the  company  was  to  be  $100,000  divided 
into  40,000  shares  of  $2.50  each.  The  entire  subscription 
was  written  on  the  terms  set  forth.  The  defendants  then 
organized  the  plaintiff  company,  being  the  sole  incorpora- 
tors.  Upon  the  organization,  Main  subscribed  for  all  the 
stock,  with  the  exception  of  two  shares  subscribed  for  by 
the  defendants  Spooner  and  Oakley.  At  the  same  time,  a 
vote  was  passed  by  the  defendants,  as  the  sole  incorporators 
and  directors,  authorizing  the  issue  of  the  shares  subscribed 
for  by  Main  to  him  or  to  such  persons  as  he  might  desig- 
nate, upon  his  transfer  of  the  mining  rights  to  the  company. 
The  mining  rights  were  then  transferred  by  the  owners  to 
Main,  and  by  Main  were  transferred  to  the  company.  The 
shares  subscribed  for  by  Main  were  issued  to  the  persons 
who  had  agreed  with  him  to  take  shares,  and  $100,000 
was  paid  by  them  therefor  to  the  company.  The  defend- 
ants from  this  sum  paid  the  original  owners  of  the  mining 
rights  $20,000,  kept  $10,000  in  the  treasury,  and  divided 
the  remaining  $70,000  among  themselves.  It  was  held 
that  they  must  account  to  the  company  for  the  $70,000  as 
secret  profit  to  which  the  company  was  entitled. 


ACCOUNTABILITY   OF   PEOMOTERS   TO   CORPORATION.         63 

§  58.  Right  of  corporation  to  benefit  of  optional  purchase 
made  by  third  persons  confederating  with  promoter.  —  The 
promoters  may,  instead  of  acquiring  in  their  own  name  an 
option  for  the  purchase  of  property  to  be  sold  to  the  corpo- 
ration at  an  advance,  induce  others  to  acquire  the  option, 
in  pursuance  of  a  scheme  by  which  the  property  is  to  be 
sold  at  an  advance  to  the  corporation,  the  interest  of  the 
promoters  being  concealed,  and  the  profits  thereby  secured 
secretly  divided  among  the  promoters  and  such  third  per- 
sons as  their  confederates.  In  this  case  they  are  all  alike 
liable  to  account  to  the  corporation.  The  persons  con- 
federating with  the  promoters,  although  not  taking  part  or 
assisting  in  the  formation  of  the  corporation  or  in  obtain- 
ing its  capital,  and  therefore  not  promoters  or  in  a  fiduciary 
position  towards  the  corporation,  are  nevertheless  account- 
able to  it  on  the  principle  of  law  that  when  several  persons 
combine  in  a  fraudulent  conspiracy  to  cheat  another,  and 
each  takes  some  part  in  carrying  it  out,  they  are  all  liable 
to  the  defrauded  party  for  the  wrong  done,  and  each  is 
liable  without  reference  to  the  degree  of  his  activity  or  to 
the  amount  of  profit  which  he  has  reaped  from  the  fraud. 

§  59.  In  Fountain  Spring  Park  Co.  v.  Roberts,1  —  the  plain- 
tiff corporation  sought  to  recover  certain  secret  profits  ob- 
tained by  the  defendants  on  a  sale  of  land  to  the  corporation. 
The  complaint  alleged  in  substance  the  following  facts  : 
The  defendants,  Carrick  and  Willis,  were  promoters  of  the 
corporation  which  they  brought  into  existence  in  order  that 
it  might  purchase  a  certain  tract  of  land,  and  that  they 
might  secure  a  secret  profit  in  this  purchase  when  made. 
One  Webber  held  an  option  for  the  purchase  of  the  land  in 
question  from  the  owner  at  the  price  of  $12,750.  The 
defendants,  Russell  and  Roberts,  agreed  to  assist  Carrick 

1  92  Wise.  345.  See  also  Boston  v.  Simmons,  150  Mass.  461;  Emery 
v.  Parrott,  107  Mass.  95. 


64  PROMOTERS  AND   PROMOTION   OF  CORPORATIONS. 

and  Willis  in  carrying  out  their  fraudulent  scheme  to 
secure  a  secret  profit  at  the  expense  of  the  corporation,  and 
it  was  agreed  that  the  profit  should  be  divided  among  the 
four.  Carrick  and  Willis  then  procured  the  formation  of  the 
corporation  and  the  subscription  of  its  capital,  representing 
to  the  subscribers  that  the  land  would  cost  $23,000.  While 
subscriptions  were  being  obtained,  Russell  and  Roberts 
purchased  Webber's  option  for  $600,  and  held  it  subject  to 
the  order  of  Carrick  and  Willis.  Shortly  afterward,  the 
land  was  conveyed  to  the  corporation  for  $23,000,  and  the 
profit  on  the  real  purchase  price  of  $12,750  was  secretly 
divided  among  the  defendants.  It  was  held  that  the  facts 
stated  were,  if  proved,  sufficient  to  sustain  the  complaint 
against  all  the  defendants,  and  a  demurrer,  which  they  had 
interposed,  was  overruled. 

§  60.  Right  of  corporation  to  recover  profit  obtained  by  pro- 
moter on  sale  of  his  property  to  it.  —  Definition  of  term  "profit." 
—  When  the  promoter  of  a  corporation,  without  disclosing 
his  interest,  sells  to  it  property  which  he  purchased,  abso- 
lutely or  conditionally,  before  he  became  a  promoter,  ordi- 
narily the  corporation  cannot,  as  we  have  seen,  claim  the 
benefit  of  the  purchase,  and  recover  the  difference  between 
the  price  paid  by  it  and  the  price  paid  by  the  promoter.  But 
whether  or  not  the  corporation  may  recover  the  profit  made 
by  the  promoter  on  the  sale  to  it,  is  another  question.  This 
profit  is  not  the  difference  between  the  price  that  the  pro- 
moter gave  and  that  which  he  got  from  the  corporation, — 
the  promoter  may  have  got  the  property  as  a  gift,  —  but  the 
difference  between  the  value  of  the  property  at  the  time  of 
its  purchase  by  the  corporation,  and  the  price  which  the 
corporation  paid.  The  question  may  arise  in  two  cases. 

§  61.  When  property  is  commodity  in  market.  —  First. 
When  the  property  sold  to  the  corporation  is  a  commodity 
bought  and  sold  in  the  market,  and  having  a  current  market 


ACCOUNTABILITY  OF  PROMOTERS  TO  CORPORATION.    65 

price.  Reasoning  from  analogy,  we  may  take  the  rule  ap- 
plicable to  one  who  accepts  an  agency  to  buy  some  article 
in  the  market,  and  then  sells  to  his  principal  his  own  goods, 
without  disclosing  his  interest.  In  such  case  the  agent  is 
liable  to  account  to  the  principal  for  his  profit. 

Thus,  in  Parker  v.  Nickerson,1  a  bill  was  brought  by  the 
receiver  of  the  East  Boston  Ferry  Company  against  the  de- 
fendant for  an  accounting.  The  defendant  was  the  treas- 
urer of  the  company,  and  had  sold  a  quantity  of  coal  to  it 
for  $9.25  per  ton.  He  did  not  originally  buy  the  coal  for  the 
purpose  of  selling  it  to  the  company,  and  did  not  buy  it  at 
a  time  when  it  was  his  duty  to  buy  coal  for  the  company. 
The  coal  had  been  used,  so  that  it  was  not  possible  to  restore 
it.  The  Court  held  that  the  amount  .due  to  the  company 
was  not  the  difference  between  the  price  charged  the  com- 
pany and  the  price  at  which  the  defendant  purchased,  on 
the  plaintiff's  theory  that  the  company  was  entitled  to  the 
benefit  of  the  defendant's  purchase,  but  the  difference 
between  the  price  charged  and  the  fair  market  price  at  the 
time  of  the  sale.  The  authority  and  duty  of  the  defendant 
as  treasurer  of  the  company,  it  was  held,  was  to  buy  coal 
for  it  in  the  market  at  the  market  price.  He  was  there- 
fore not  entitled  to  the  larger  price  which  he  had  charged.2 

By  analogy  to  this  rule,  is  a  promoter  who  sells  his  own 
goods  to  the  corporation  while  occupying  a  fiduciary  posi- 
tion toward  it,  liable  to  account  to  the  corporation  for  his 
profit  ?  Take,  for  illustration,  a  case  where  a  promoter  of 
a  railroad  corporation  sells  to  it  steel  rails.  The  promoter, 
it  is  true,  is  not  in  the  position  of  an  agent  to  buy  ;  that 
duty  rests  with  the  directors.  But  the  promoter  is  in  a 
fiduciary  relation  to  the  corporation,  and  one  of  the  conse- 

1  137  Mass.  487. 

2  See  also  Kimber  v.  Barker,  8  Ch.  56;  In  re  Cape  Breton  Co.,  29 
Ch.  D.  at  p.  811 ;  Bentinck  v.  Fenn,  12  App.  Gas.  652. 

6 


66  PROMOTERS  AND   PROMOTION   OF   CORPORATIONS. 

quences  of  that  is,  that  he  is  not  as  a  rule  permitted  to 
retain  a  secret  profit  arising  out  of  or  received  by  him  in 
connection  with  the  promotion  of  the  corporation.  If  when 
he  sells  his  goods  to  the  corporation,  he  is  not  dealing  with 
it  at  arm's-length,  he  is  in  no  better  position  with  respect  to 
the  right  to  make  a  secret  profit  than  is  the  director.  For 
example,  although  he  is  not  an  agent  to  buy,  he  cannot  re- 
tain a  secret  commission,  paid  to  him  by  the  vendor  of 
property  to  the  corporation  from  the  purchase  money. 
Being,  in  the  eye  of  the  law,  under  the  same  disability  in 
this  respect  as  a  director,  it  would  seem  that  if  the  director 
must  account  for  a  secret  profit  realized  on  a  sale  of  his 
goods  to  the  corporation,  the  promoter  on  a  similar  sale 
must,  on  the  same  principle,  be  liable  to  account  for  his 
profit.  But  to  support  the  analogy  between  the  director 
and  the  promoter,  facts  must  appear,  it  seems  reasonable 
to  say,  to  show  that  the  promoter  has  by  virtue  of  his  posi- 
tion as  such  some  advantage  over  the  corporation  in  mak- 
ing the  sale.  If  competent  and  disinterested  directors,  not 
nominated  by  the  promoter,  and  not  subject  to  his  influ- 
ence or  control,  have  fairly  passed  upon  the  purchase  of 
the  property,  there  would  appear  to  be  no  ground  for  hold- 
ing the  promoter  accountable  for  his  profit. 

§  62.  When  property  is  not  commodity  in  market.  —  Sec- 
ond. When  the  property  sold  to  the  corporation  is  a  spe- 
cific property,  sui  generis,  such  as  a  mill,  or  a  patent,  or  a 
particular  tract  of  land,  for  the  purchase  of  which  the  cor- 
poration is  brought  into  existence.  Here  it  would  seem 
that  the  director  who  owns  the  property  and  sells  it  to  the 
corporation  without  disclosing  his  interest  is  not  bound  to 
sell  at  the  market  price,  or  if  there  is  no  market  price,  at 
the  fair  price,  and  the  corporation  is  not  entitled  to  insist 
on  having  the  property  at  the  market  or  fair  price.  If  a 
director,  selling  under  such  conditions  to  the  corporation, 


ACCOUNTABILITY   OF  PROMOTERS  TO   CORPORATION.        67 

is  not  accountable  to  the  corporation  for  his  profit,  as 
profit,  a  promoter,  by  analogy,  would  not  be  liable.  There 
has  been  some  judicial  difference  of  opinion  as  to  the 
liability  of  a  director  to  account  for  his  profit  under  the 
circumstances  stated,  but  the  decisions,  and,  it  would  seem, 
the  weight  of  argument,  are  in  favor  of  the  theory  of  non- 
liability.1 In  the  case  In  re  Cape  Breton  Co.,2  the  ques- 
tion arose,  and  it  was  held  by  a  majority  of  the  Court, 
Bowen,  L.  J.,  dissenting,  that  a  director  was  not  so 
liable.  On  appeal,  in  the  House  of  Lords,  the  decision 
went  off  on  another  point,  and  the  question,  although 
considered,  was  not  decided.3  The  view  that  the  direc- 
tor must  account  for  his  profit  was  thus  stated,  in  part, 
by  Bowen,  L.  J. :  "  It  seems  to  me,  upon  every  prin- 
ciple of  justice  and  equity,  to  be  clear,  that  in  all  cases 
where  a  person  is  directly  or  constructively  an  agent  or 
trustee  for  other  persons,  all  profits  made  by  him  on  behalf 
of  the  business  in  which  he  is  so  employed,  without  the 
knowledge  of  his  cestuis  que  trust,  belong  in  equity  to  his 
employers,  and  not  to  himself.  If  there  was  a  clandes- 
tine profit  he  must  hand  it  over.  .  .  .  The  cestui  que  trust 
who  seeks  to  keep  the  thing  purchased,  and  nevertheless 
demands  the  profit  improperly  made,  does  not  claim  to  be 
recouped  part  of  the  price,  as  price,  nor  attempt  in  any  way 
to  vary  the  contract.  The  fraudulent  agent  or  trustee  who 
made  the  contract  knew  from  the  first,  or  ought  to  have 
known,  that  it  was  an  incident  of  equity  and  fair  play  at- 
taching to  such  a  contract,  that  an  agent  or  trustee  was 
liable,  upon  demand,  to  hand  back  any  profit  clandestinely 

1  In  an  action  to  recover  damages  for  a  breach  of  the  duty  to  dis- 
close interest,  the  profit  might  or  might  not  afford  a  measure  of  the 
damage ;  but  this  presents  another  question,  which  will  be  discussed 
later  on. 

2  23  Ch.  D.  795.  «  Bentinck  v.  Perm,  12  App.  Cas.  652. 


68  PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

made  by  him.  Making  a  vendor  return  something  which 
he  ought  not  to  have,  is  not  altering  the  contract,  it  is 
only  insisting  upon  an  incident  which  equity  attaches  to  it. 
A  contract  is  not  set  aside  merely  because  an  incident  which 
is  attached  to  it  by  equity  is  enforced,  and  in  the  same  way, 
it  seems  to  me  that  it  cannot  be  said  that,  by  affirming  a 
contract,  the  person  who  affirms  it  releases  any  right  which 
is  not  inconsistent  with  the  contract  itself." 1 

1  29  Ch.  D.  at  p.  808.  See  Goodin  v.  Cincinnati  Sf  Whitewater  Canal 
Co.,  18  Ohio  St.  170,  as  supporting  the  view  taken  by  Bowen,  L,  J. 

The  Cincinnati  and  Whitewater  Canal  Company  owned  and  main- 
tained a  certain  canal.  Two  railroad  companies  desiring  to  obtain 
control  of  the  canal,  and  convert  it  into  a  railroad  track,  bought  more 
than  half  the  stock  of  the  canal  company,  and  with  the  power  thus 
acquired,  reorganized  its  board  of  directors,  putting  in  place  of  the  old 
directory,  members  who  were  in  the  interest  of  the  railroad  com- 
panies, and  at  their  head,  as  president,  a  Mr.  Lord  who  was  president 
of  the  two  railroad  companies.  Proceedings  were  then  begun  against 
the  canal  company  by  one  of  the  railroad  companies  for  the  condemna- 
tion of  the  canal  for  use  as  a  track.  By  an  agreement  between  the 
boards  of  directors  of  the  two  companies,  parties  to  the  proceedings,  a 
jury  was  dispensed  with,  the  amount  of  compensation  and  damages  fixed 
at  $55,000,  and  the  canal  condemned  to  the  use  of  the  railroad  com- 
pany. The  amount  named  was  less  than  the  fair  value  of  the  canal. 
At  this  time  certain  mortgages  given  by  the  canal  company  were  in 
suit.  The  railroad  companies  bought  a  controlling  interest  in  these 
mortgages,  and  thereupon  procured  a  stay  of  proceedings  and  an  order 
placing  the  sum  of  $55,000  in  the  hands  of  Mr.  Lord,  as  receiver  in  the 
case,  in  lieu  of  the  canal  property.  Mr.  Lord  then,  as  president  of  the 
condemning  railroad  company,  paid  to  himself,  as  receiver,  the  $55,000, 
thus  paying  to  the  canal  company  the  amount  of  the  condemnation 
money.  The  canal  was  converted  into  a  road-bed  by  the  railroad  com- 
pany Jast  mentioned,  and  then  leased  to  the  other  railroad  company. 

The  plaintiffs,  as  stockholders  and  creditors  of  the  canal  company, 
brought  their  bill  in  equity  making  the  three  corporations  parties  defend- 
ant. The  prayer  was,  that  the  pretended  sale,  or  condemnation  of 
the  canal  property,  might  be  set  aside  as  a  fraud  upon  the  minority  of 
the  stockholders  and  creditors,  who  did  not  participate  therein ;  and 
that  the  railroad  companies  might  be  enjoined  from  using  the  line  and 
fixtures  of  the  canal  for  railroad  purposes,  and  that  if  neither  of  these 
remedies  could  be  granted,  then  that  the  railroad  companies  might  be 


ACCOUNTABILITY   OF   PROMOTEES   TO   CORPORATION.        69 

The  opposing  view  was  stated  by  Fry,  L.  J.,  in  part  as 
follows  :  "  That  in  such  a  case  the  principal  would  have  a 
right  to  rescind,  there  can  be  no  doubt.  The  option  which 
the  principal  had,  has,  in  this  case,  been  exercised  by  con- 
firming the  contract  with  knowledge  of  the  facts,  and  the 
question  is  whether,  after  that  affirmation,  the  agent  is 
liable  in  any  sum  to  his  principal.  ...  It  appears  to  me 
that  to  allow  the  principal  to  affirm  the  contract,  and  after 
the  affirmation  to  claim,  not  only  to  retain  the  property, 
but  to  get  the  difference  between  the  price  at  which  it  was 
bought  and  some  other  price,  is,  however  you  may  state  it, 
and  however  you  may  turn  the  proposition  about,  to  enable 
the  principal,  against  the  will  of  his  agent,  to  enter  into  a 

adjudged  to  hold  the  property  as  trustees,  and  compelled  to  account 
for  the  full  value  of  the  same  to  the  canal  company  or  to  its  stock- 
holders and  creditors. 

The  Court  held  that  the  plaintiffs  had,  by  reason  of  their  laches,  lost 
the  right  to  the  remedy  of  rescission,  the  railroad  company  having 
expended  large  sums  of  money  in  constructing  works  and  ways. 

"  The  question  of  compensation,  however,"  the  Court  said,  "  stands 
upon  a  very  different  basis.  The  railroad  company,  having  acquired 
this  property,  ought  to  pay  for  it  a  fair  value,  unless  by  an  agreement 
between  the  parties,  such  as  a  Court  of  Equity  will  uphold,  a  less  price 
has  been  fixed.  Was  $55,000,  then,  a  fair  value  for  the  property? 
And,  if  not,  did  the  parties  by  a  valid  agreement  fix  upon  a  less 
sum?  These,  it  seems  to  us,  are  the  only  questions  remaining  in  the 
case,  and  we  are  constrained  to  answer  them  in  the  negative.  We 
think  the  price  was  grossly  inadequate,  and  that  the  agreement  can- 
not be  sustained  in  a  Court  of  Equity." 

It  was  accordingly  held,  that  the  railroad  company  was  liable  to 
account  to  the  canal  company  for  the  full  value  of  the  property  taken, 
less  the  sum  of  $55,000  already  paid. 

The  decision  was  put  on  two  grounds. 

1.  The  sale  was,  in  effect,  a  sale  by  the  railroad  company  to  itself. 
There  was  no  adverse  interest  or  adversary  parties,  and  the  sale  was  a 
mere  form.     Such  a  transaction  on  the  part  of  a  trustee  does  not  bind 
the  cestui  que  trust. 

2.  The  property  of  a  corporation  is  a  trust  fund  in  the  hands  of  its 
directors,  for  the  benefit  of  its  creditors  and  stockholders. 


70  PKOMOTERS  AND  PROMOTION   OF  CORPORATIONS. 

new  contract  with  the  agent,  a  thing  which  is  plainly 
impossible,  or  else  it  is  an  attempt  on  the  part  of  the 
principal  to  confiscate  the  property  of  his  agent  on  some 
ground  which,  I  confess,  I  do  not  understand.  It  is  said 
that,  notwithstanding  the  ratification  of  the  contract, 
the  principal  may  claim  some  profits  from  the  agent  be- 
cause these  profits  were  made  surreptitiously  or  clandes- 
tinely. It  appears  to  me  that  the  answer  to  that  is  this, 
that  whatever  the  profits  are,  and  however  they  are  to  be 
measured,  these  profits  result,  not  from  the  original  con- 
tract, but  from  the  affirmance  of  the  contract  by  the  prin- 
cipal, and  that,  therefore,  the  profits  which  are  made  by 
the  agent  are  neither  clandestine  nor  surreptitious.  .  .  . 
Where  the  principal  had  no  right  to  claim  the  property 
as  having  been  purchased  on  his  behalf  at  the  smaller 
price,  the  voluntary  ratification  of  the  purchase  by  the 
principal  is  equivalent,  for  this  purpose,  to  a  new  sale  by 
the  agent  to  the  principal  after  the  relation  between  them 
had  ceased,  and  it  is  only  in  consequence  of  the  ratification 
or  adoption  that  any  profits  remain  in  the  hands  of  the 
agent.  ...  It  is  not  a  case  of  profits  made  clandestinely 
or  surreptitiously,  because  those  profits  have  not  arisen 
from  the  original  transaction  alone,  but  from  the  adoption 
of  it  by  the  principal."  l  The  rule  laid  down  by  the  ma- 
jority of  the  judges  in  this  case  was  adopted  and  applied 
to  promoters  in  Ladywell  Mining  Co.  v.  Brooks.'2 

In  a  recent  case  in  the  Supreme  Court  of  Illinois,3  it 
appeared  that  a  corporation  had  purchased  from  one  of  its 


1  29  Ch.  D.  at  p.  811. 

2  35  Ch.  D.  400.    See  also  Great  Luxembourg  Co.  v.  Magnay,  25  Beav. 
586  ;  and  the  opinions  of  Lord  Cairns  and  Lord  Hatherly  in  Erlanger 
v.  New  Sombrero  Phosphate  Co.,  3  App.  Gas.  1218. 

3  Higcjins  v.  Lansingh,  154  111.  301,  378.     See  also  Ely  v.  Hanford, 
65  111.  267. 


ACCOUNTABILITY   OF   PROMOTERS   TO   CORPORATION.        71 

directors  lands  which  such  director  had  bought  before  he 
became  a  director.  It  was  held  that  the  corporation  could 
not  recover  the  profit  made  by  the  director  on  the  sale  ; 
that  there  could  be  no  rescission  without  restoring  the 
land.  "  It  might  well  be,"  said  the  Court,  "  that  he  would 
not  have  sold  to  the  company  for  what  the  land  would 
have  brought  in  the  market  at  the  time  the  company 
purchased  it.  He  had  a  right  to  keep  the  land  until  he 
could  get  his  price  for  it,  and  we  know  of  no  power  in 
a  Court  of  Equity  to  compel  him  to  sell  the  land  for  its 
market  value."  1 


ARTICLE  II.  —  ACCOUNTABILITY  OF  PROMOTERS  FOR  GIFTS  AND 
COMMISSIONS. 


§  63.    Explanation  of  term  "  promo- 
tion money." 

64.  Accountability  of  promoters 

for  promotion  money. 

65.  Hichens  v.  Congreve,  4  Russ. 

562  ;  1  Russ.  &  Myl.  150,  n. 

66.  Beck  v.  Kantorowicz,  3  Kay 

&  J.  230. 

67.  Lydney  &  Wigpool  Iron  Ore 

Co.  v.  Bird,  33  Ch.  D.  85. 

68.  Bagnall  v.  Carlton,  6  Ch.  D. 

371. 

69.  Emma  Silver  Mining  Co.  v. 

Grant,  11  Ch.  D.  918. 

70.  Emma  Silver  Mining  Co.  v. 

Lewis,  4  C.  P.  D.  396. 

71.  McElheney's  Appeal,  61  Penn. 

188. 

72.  Chandler  v.  Bacon,  30  Fed. 

Rep.  538. 


§  73.  In  re  Westmoreland  Green  & 
Blue  Slate  Co.,  2  Ch.  (1893) 
612. 

74.  Yale  Gas  Stove  Co.  v.  Foley, 

64  Conn.  105. 

75.  Right  of  corporation   to  re- 

cover from  vendor  promo- 
tion money  which  he  has 
secretly  agreed  to  pay  to 
promoter. 

76.  Accountability  to  corporation 

of  persons  confederating 
with  promoters. 

77.  Right  of  corporation  to  re- 

cover from  promoters  gifts 
and  commissions  not  ob- 
tained at  its  expense. 

78.  In  re  North  Australian  Terri- 

tory Co.,  1  Ch.  (1892)  322. 


1  In  Densmore  Oil  Co.  v.  Densmore,  64  Penn.  43,  it  was  held  that 
the  promoters  of  the  plaintiff  corporation  were  not  liable  to  account  to 
it  for  their  profit  on  a  sale  to  it  of  property  which  they  had  purchased 
before  they  became  promoters  ;  but  the  case  is  not  of  weight  on  the 
question  discussed  in  the  text,  inasmuch  as  it  appeared  that  the 


72     PKOMOTEKS  AND  PROMOTION  OF  CORPORATIONS. 

§  63.  Explanation  of  term  "  promotion  money."  —  The  pay- 
ment of  promotion  money  is  a  common  expedient  adopted 
to  secure  compensation  to  promoters.  Promotion  money 
consists  of  money  or  shares  obtained  by  a  vendor  of  the 
corporation,  nominally  as  a  portion  of  the  purchase  price 
of  the  property  which  he  sells  to  the  corporation,  but  in 
reality  as  a  sum  in  excess  of  the  price  at  which  he  was 
satisfied  to  sell,  to  be  handed  over  to  the  promoters.  It  is 
obtained  by  intentionally  swelling  the  price  for  the  purpose 
of  making  the  corporation  itself  pay  the  sum  it  has  been 
arranged  that  the  promoters  shall  receive  as  their  reward 
for  the  part  they  are  to  take  in  the  scheme.1 

§  64.  Accountability  of  promoters  for  promotion  money.  — 
Promoters  are  in  all  cases  liable  to  account  to  the  corpora- 
tion for  promotion  money  received  by  them,  without  the 
knowledge  and  consent  of  the  corporation.  It  will  not 
avail  them  to  say  that  in  promoting  the  corporation  they 
acted  as  agents  for  the  vendor,  that  the  money  has  been 
paid  to  them  by  the  vendor  for  services  rendered  to  him, 
and  that  it  is  but  reasonable  compensation  for  such 
services. 

"  It  was  urged,"  said  Cotton,  L.  J.,  in  Bagnall  v.  Carlton? 
"  why  should  not  the  vendor  pay  his  agent  ?  And  there 
was  a  sum  paid  to  these  gentlemen  for  services  to  be  ren- 
dered to  the  vendor.  I  said  during  the  argument,  and  I 
repeat  it,  that  a  vendor  may  pay  his  agent  —  nobody  doubts 
it ;  but  supposing  that  agent  occupies  another  position, 
that  of  agent  or  trustee  for  the  purchaser,  can  he,  as  agent 
for  the  purchaser,  looking  to  his  position  of  trustee  or  agent 

promoters  disclosed  their  ownership ;  that  the  price  at  which  they 
sold  was  fair  and  reasonable,  and  that  all  the  original  shareholders 
representing  the  entire  capital  stock  acquiesced  in  the  transaction  at 
the  time. 

1  Arkwright  v.  Newlold,  17  Ch.  D.  301. 

2  6  Ch.  D.  at  p.  408. 


ACCOUNTABILITY  OF   PKOMOTEKS   TO   CORPORATION.        73 

for  him,  retain  that  which,  if  he  had  not  occupied  that  posi- 
tion, he  might  have  received,  and  properly  received,  from  the 
vendor  ? "  And  in  Pearson's  Case,1  Sir  George  Jessel,  speak- 
ing of  a  promoter  who  sought  to  retain  promotion  money 
secretly  received  by  him,  said :  "  Can  he  be  allowed  to  say 
in  a  Court  of  Equity  that  he,  having  received  a  present 
of  part  of  the  purchase  money,  and  being  knowingly  in  the 
position  of  agent  and  trustee  for  the  purchaser,  can  retain 
that  present  as  against  the  actual  purchaser  ?  "  It  is  im- 
material that  the  purchase  was  advantageous,  or  that  the 
property  was  worth  the  price  paid.  On  the  theory  of 
trusteeship,  the  corporation  is  entitled  to  recover  the 
amount  paid  to  the  promoter.2  The  cases  stated  in  the 
succeeding  sections  will  serve  to  illustrate  the  rule  as  to 
promotion  money. 

§  65.  Hichens  v.  Congreve.3  —  The  promoters  of  the  com- 
pany, with  the  connivance  of  the  vendor,  obtained,  in  the 
sale  of  certain  mines  to  the  company,  a  large  secret  profit 
or  commission  which  they  divided  among  themselves,  their 
agents,  and  the  directors  of  the  company.  A  bill  was 
brought  against  the  recipients  of  the  moneys  thus  divided, 
to  compel  restitution  to  the  company.  "  Upon  the  face  of 
the  bill,"  said  the  Lord  Chancellor,  "  I  cannot  help  con- 
sidering the  transactions  stated  in  it  to  be  fraudulent.  Sir 
William  Congreve  entered  into  a  negotiation  with  Flattery 
for  the  purchase  of  the  property  in  question  at  the  price  of 
£10,000,  for  a  joint-stock  company  of  which  he  was  to  be 
a  member  and  a  director.  After  the  treaty  was  begun,  the 
two  Clarkes  associated  themselves  with  Sir  William  Con- 
greve in  the  scheme  ;  and  the  negotiations  with  Flattery 

1  5  Ch.  D.  336. 

8  Pearson's  Case,  5  Ch.  D.  336  ;  Phosphate  Sewage  Co.  v.  Hart- 
mont,  5  Ch.  D.  394. 

s  4  Russ.  562 ;  1  Russ.  &  Myl.  150,  n. 


74     PROMOTERS  AND  PEOMOTION  OF  CORPORATIONS. 

went  on.  The  object  was  the  purchase  of  the  Arigna  mines, 
in  order  that  they  might  be  conveyed  to  a  company  by  whom 
they  were  to  be  worked ;  and  the  company  was  to  consist, 
not  of  Congreve  and  the  Clarkes  alone,  but  of  a  considerable 
body  of  shareholders.  It  appears  that,  in  the  course  of  the 
negotiations,  Congreve  and  the  Clarkes  became  desirous  of 
making  a  profit  out  of  the  original  transaction  for  the  pur- 
chase of  Flattery's  interest  in  the  mines.  The  first  plan 
which  occurred  to  them  was  that  a  conveyance  for  the 
sum  of  £10,000  should  be  made  to  persons  nominated  by 
them,  who  were  afterward  to  convey  to  the  company  for 
£25,000.  If  such  a  transaction  had  taken  place,  and  the 
particulars  had  been  concealed  from  the  company,  it  could 
not  have  been  sustained  ;  for,  considering  the  situation  in 
which  Congreve  and  the  Clarkes  stood  with  reference  to 
the  company,  it  would  have  been  incumbent  upon  them  to 
have  communicated  the  real  price  at  which  the  mine  had 
been  purchased  of  Flattery.  This  objection  appears  to  have 
occurred  to  them ;  and,  accordingly,  another  shape  was 
given  to  the  proceedings.  The  plan  now  adopted  was  this  — 
that  a  conveyance  should  be  executed  directly  from  Flattery 
to  trustees  for  the  company,  and  although  Flattery  had 
agreed  to  convey  the  property  for  <£  10,000,  that  in  this 
conveyance  it  should  be  stated  that  the  purchase  money 
was  £  25,000,  in  order  that  the  difference  might  be  put  into 
the  pockets  of  Sir  William  Congreve  and  the  two  Clarkes, 
and  some  other  individuals  whom  they  might  choose  to 
nominate.  Such  a  transaction  is  so  incorrect,  that  it  is 
quite  impossible  that  any  Court  of  justice  could  permit  it 
to  stand  ;  and  if,  after  the  conveyance  had  been  made,  re- 
citing that  the  price  paid  to  Flattery  was  £25,000,  a  com- 
pany of  shareholders  was  formed,  who  acted  upon  that 
representation,  they  could  in  justice  be  chargeable  only 
with  the  money  actually  paid  to  Flattery  ;  and  if  a  larger 


ACCOUNTABILITY   OF   PROMOTERS   TO   CORPORATION.        75 

sum  was  taken  out  of  their  funds,  they  would  be  entitled 
to  call  on  the  individuals  into  whose  hands  it  came  to  re- 
fund it.  In  substance,  therefore,  the  plaintiffs  are  entitled 
to  relief." 

§  66.  In  Beck  v.  Kantorowicz,1  —  four  out  of  five  persons 
who  entered  into  a  provisional  contract  to  purchase  a 
mine,  which  they  agreed  to  sell  for  their  joint  benefit  to 
a  company  to  be  formed,  were  deceived  by  the  fifth,  the 
defendant,  who,  assuring  them  that  the  vendors  would 
not  take  less  than  £85,000,  obtained  secretly  from  the 
latter  an  agreement  that,  if  the  contract  were  perfected 
and  money  paid,  he  should  receive  thereout  a  bonus  of 
£20,000  for  his  pains  in  effecting  the  sale.  Two  of  the 
four,  having  absolute  powers  from  the  rest  to  sell  to 
the  intended  company,  then  formed  themselves  with  others 
into  a  committee  of  management,  and,  still  ignorant  of 
the  surreptitious  agreement  between  the  defendant  and 
the  vendors,  issued  a  prospectus  stating  that  a  contract 
had  been  entered  into  for  the  purchase  by  the  company 
of  the  entire  property  for  £125,000, "  including  all  pre- 
liminary expenses  and  a  premium  to  the  parties  who 
incurred  the  risk  and  responsibility  of  the  original  pur- 
chase." After  the  company  had  been  established,  the 
required  capital  paid  in,  and  the  provisional  contract  per- 
fected, the  agreement  for  the  payment  of  the  bonus  of 
£20,000  to  the  defendant  was  discovered,  and  a  bill 
was  brought  against  him  to  compel  an  accounting  for 
it  to  the  company.  It  was  held  that  the  transaction  in 
relation  to  the  bonus  was  fraudulent  and  void,  not  only 
as  against  the  defendant's  co-promoters  who  were  asso- 
ciated with  him  in  the  original  purchase,  but  also  as 
against  the  company.  It  was  not  enough  that  the  com- 
pany got  the  whole  of  its  bargain  ;  it  had  the  right,  it 

1  3  Kay  &  J.  230. 


76  PEOMOTEKS   AND   PROMOTION  OF  CORPORATIONS. 

was  held,  to  the  best  bargain  which  the  two  members 
of  the  committee  of  management,  had  they  known  the 
facts,  would  have  been  in  a  position,  acting  fairly  and 
rightly,  to  give  it.  The  premium  alluded  to  in  the  pro- 
spectus was  a  premium  of  £30,000  to  be  paid  from  the  dif- 
ference between  the  £  85,000  and  the  £125,000.  Another 
premium,  payable  out  of  the  .£85,000  to  one  of  the  pro- 
moters alone,  in  addition  to  his  share  of  the  £30,000, 
was  never  contemplated  in  drawing  up  the  prospectus. 
The  defendant,  having  concealed  the  arrangement  by  which 
he  was  to  receive  an  extra  premium  of  £20,000,  left  it 
to  his  co-promoters  to  fix  the  amount  to  be  allowed  by 
the  company  as  a  premium,  and  permitted  them  to  con- 
tract with  the  company  that  the  premium  should  be 
X 30,000,  and  no  more ;  and  he  was  deemed  thereby  to 
have  joined  with  his  co-promoters  in  making  such  con- 
tract, which  it  was  held  ought  to  be  enforced  in  favor  of 
the  company.  The  defendant  was  accordingly  compelled 
to  account  to  the  company  for  his  bonus  of  ,£20,000. 

§  67.  Lydney  &  Wigpool  Iron  Ore  Co.  v.  Bird.1  —  The 
facts  and  the  law  are  thus  stated  in  the  opinion  of  Lindley, 
L.  J. :  — 

"  James  Bird  procured  the  company  to  be  formed  and 
to  be  managed  in  such  way  as  to  transfer  from  the  moneys 
of  the  company  to  himself  the  sum  of  £10,800,  without 
informing  the  company  of  that  fact.  The  company  were 
told  that  they  had  to  pay  £100,000  for  the  property ; 
but  they  did  not  know  that  of  that  sum  £10,800  was 
to  go  into  the  pockets  of  the  man  who  got  the  company 
up,  and  who  had  in  fact  increased  the  purchase  price  in 
order  to  get  that  £10,800.  .  .  .  That  Bird  was  acting  for 
the  vendors  does  not  free  him  from  liability  to  account 
for  the  £10,800.  In  procuring  that  money  he  was  not 

1  33  Ch.  D.  85. 


ACCOUNTABILITY   OF   PROMOTERS   TO   CORPORATION.        77 

acting  in  their  interest,  but  in  his  own,  for  though  in 
form  it  was  part  of  the  price  paid  to  them,  the  .£10,800 
was  in  truth  to  be  paid  out  of  the  price  to  him.  His 
liability  to  account  for  this  rests  on  his  own  conduct, 
not  on  theirs,  and  as  an  agent  is  personally  responsible 
for  his  own  torts  and  frauds,  though  committed  by  him 
for  other  people,  so  a  person  acting  as  Mr.  James  Bird 
did  in  getting  £10,800  from  the  company,  without  dis- 
closing the  fact,  is  personally  liable  to  account  for  it, 
although  in  getting  up  the  company  he  may  have  been 
acting  for  the  vendors." 

§  68.  Bagnail  v.  Cariton.1  —  The  owners  of  property  em- 
ployed certain  persons  as  their  agents  to  form  a  corpo- 
ration and  procure  subscriptions  for  shares  to  pay  for 
the  property,  which  they  agreed  'to  transfer  to  the  cor- 
poration for  X  290,370.  From  the  proceeds  of  the  sale, 
the  owners  agreed  to  pay  the  agents  X  85,000.  The 
corporation  was  formed,  its  capital  stock  was  taken  by 
subscribers,  the  property  was  transferred  to  it,  and  the 
purchase  price  was  paid  to  the  vendors,  who,  in  accord- 
ance with  their  agreement,  paid  therefrom  to  their  agents 
for  their  services  the  sum  of  £85,000.  The  prospectus 
which  was  sent  out  referred  to  the  agreement  for  the 
purchase  of  the  property,  but  made  no  mention  of  the 
agreement  between  the  vendors  and  their  agents  in  re- 
lation to  the  payment  which  the  latter  were  to  receive. 
Upon  discovering  the  facts,  the  corporation  brought  and 
maintained  an  action  against  the  agents  to  recover  their 
secret  profits.  The  employment  of  the  agents,  as  the 
Vice-Chancellor  observed,  was  for  the  purpose  of  forming 
a  corporation,  and  of  inducing  other  persons  to  subscribe, 
in  reliance  upon  a  representation  which  was  untrue ;  for 
it  was  not  true  that  the  purchase  money  payable  to  the 

1  6  Ch.  D.  371. 


78  PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

vendors  was  the  sum  mentioned  in  the  prospectus,  but 
it  was  the  purchase  money  stated,  minus  the  amount  to 
be  paid  by  the  vendors  to  their  agents  as  a  reward  for 
procuring  the  subscriptions,  and  the  nominal  purchase 
money,  so  diminished,  was  the  true  sum  which  was  to 
go  into  the  pocket  of  the  vendors.  The  agents  were  in 
a  fiduciary  relation  to  the  company ;  they  combined  to 
induce  the  belief  that  the  company  was  purchasing  from 
the  vendors  at  the  price  referred  to  in  the  prospectus 
which  they  sent  out,  when,  in  fact,  by  reason  of  the  sum 
which  they  secretly  received,  the  price  was  less ;  and  they 
were  accordingly  holden  to  account  for  the  secret  profit, 
on  the  ground  that  the  corporation  was  entitled  to  the 
benefit  of  the  real  price,  as  negotiated  by  the  defendants 
in  their  fiduciary  capacity,  which  bound  them  to  bargain 
for  the  corporation  and  not  for  themselves. 

§  69.  Emma  Silver  Mining  Co.  v.  Grant.1  —  The  Emma 
Mine  was  an  American  corporation  in  which  Park  and 
Stewart  were  interested.  Acting  in  its  behalf,  they  went 
to  England  to  negotiate  a  sale  of  its  mine,  and  to  promote 
a  corporation  to  purchase  it.  They  entered  into  an  agree- 
ment with  Albert  Grant  to  sell  the  mine  for  £1,000,000 
to  a  corporation  to  be  organized  for  the  purpose  of  buying 
it.  It  was  agreed  that  Grant  should  be  paid  by  the 
vendors  for  his  services  twenty  per  cent,  of  the  amount  of 
the  capital  of  the  corporation.  Park,  Stewart,  and  Grant 
then  organized  the  corporation  as  the  "  Emma  Silver 
Mining  Company,  Limited,"  the  mine  was  transferred  to 
it  at  the  stipulated  price,  and  the  vendors  paid  Grant  the 
commission  agreed  upon,  the  agreement  under  which  it 
was  paid  not  having  been  divulged.  As  a  promoter,  Grant 
was  compelled  to  account  to  the  corporation  for  his  secret 
profit.  He  was  not  the  owner  of  the  mine ;  he  was  in  a 

1  11  Ch.  D.  918. 


ACCOUNTABILITY  OF  PKOMOTEES  TO  CORPORATION.   79 

fiduciary  relation  to  the  corporation,  and  bound  to  act  in 
its  interest  in  bringing  about  the  purchase  of  the  mine; 
yet,  while  in  this  position,  he  contracted  to  obtain  a 
secret  commission  from  the  vendors  of  the  mine,  and 
through  the  prospectus,  which  was  issued  by  him,  made 
representations  calculated  to  induce  the  belief  that  the 
owners  of  the  mine  were  selling  it  to  the  company  for 
XI, 000,000,  when  in  fact,  by  reason  of  the  amount  to 
be  secretly  paid  by  them  to  him,  the  price  was  much  less 
than  that.  The  corporation  was  entitled  to  the  benefit  of 
the  real  price,  and  accordingly  recovered  the  secret  profit 
as  money  received  by  Grant  as  a  trustee  for  it. 

§  70.  Emma  Silver  Mining  Co.  v.  Lewis.1  —  Defendants 
entered  into  a  secret  agreement  with  the  owners  of  a 
mine,  by  which  they  were  to  assist  in  its  sale  to  a  pro- 
jected corporation,  and  were  to  be  given  therefor  by 
such  owners  250  of  the  paid-up  shares  of  the  corpo- 
ration, which  were  to  be  issued  in  part  payment  of  the 
purchase  price.  The  defendants  allowed  themselves  to 
be  referred  to  in  a  prospectus  for  information  concern- 
ing the  mine  ;  but  although  they  were  acquainted  with 
facts  detrimental  to  the  reputation  of  the  mine,  they  did 
not  disclose  them.  It  was  held  that  the  acceptance  by  the 
defendants  of  the  reference  to  them  in  the  company's 
prospectus  imposed  upon  them  a  duty  to  the  corporation 
to  answer  candidly  such  inquiries  as  might  be  made  by 
intending  applicants  for  shares,  and  that  by  this  accept- 
ance they  undertook  the  duty  of  assisting  to  float  the 
corporation  by  answering  the  inquiries  of  persons  pro- 
posing to  take  shares  in  it,  and  that  therefore  they  were 
promoters.  Being  promoters  and  in  a  fiduciary  rela- 
tion to  the  company  at  the  time  they  acquired  their 
right  to  receive  from  the  vendors  a  profit  of  250 

1  4  C.  P.  D.  396. 


80  PROMOTERS   AND   PROMOTION  OF   CORPORATIONS. 

shares,  that  profit  belonged  to  the  corporation,  and  judg- 
ment was  rendered  in  favor  of  the  corporation  for  the 
value  of  such  shares,  under  its  claim  "for  profits  re- 
ceived by  the  defendants  for  the  use  of  and  as  trustees 
for  the  plaintiff." 

§  71.  McEiheney's  Appeal.1  —  McElheney,  the  owner  of 
land,  sold  it  for  $12,000  to  certain  persons  who  proposed 
to  form  a  corporation  to  which  to  dispose  of  it  at  an 
.  advance.  He  then  associated  himself  with  these  persons 
to  form  a  corporation,  with  the  agreement  that  he  was  to 
share  in  the  secret  profit  to  be  derived  by  them  from  the 
sale  to  the  corporation.  The  corporation  was  formed  and 
the  property  transferred  to  it  for  $40,000,  the  interest  of 
the  promoters  being  concealed.  Of  this  sum,  McElheney 
received  over  $2,000  as  his  share  of  the  profit.  In  the 
original  sale  he  was  not  in  a  fiduciary  position,  and  so  that 
transaction  stood ;  but  as  to  the  subsequent  sale,  he  became 
a  promoter  of  the  corporation,  and  was  not  allowed  to 
retain  the  secret  profit.  The  receipt  of  this  money,  by 
means  of  the  fraud  practised  in  his  fiduciary  relation,  was 
a  wrong  to  the  corporation,  and  he  was  compelled  to  ac- 
count for  the  money.  At  the  time  of  the  sale  to  the 
corporation  he  did  not  own  the  land,  but  accepted  a  secret 
profit  from  the  vendors  of  the  corporation. 

§  72.  in  Chandler  v.  Bacon,2  —  the  defendants  were 
promoters  and  officers  of  the  National  Color  Printing 
Company,  which  was  formed  with  a  view  to  the  pur- 
chase of  certain  patents  owned  by  the  United  States 
Label,  Card,  and  Tag  Company.  As  such  promoters, 
they  entered  into  an  agreement  with  the  latter  company 
for  the  sale  of  the  patents  by  it  to  the  former  com- 
pany when  organized.  Under  this  agreement  they  were 
to  receive  as  a  bonus,  and  did  receive  from  the  old 

1  61  Penn.  188.  3  30  Fed.  Rep.  538. 


ACCOUNTABILITY   OF   PROMOTERS   TO   CORPORATION.        81 

company,  3,125  shares  of  the  stock  of  the  new  com- 
pany transferred  to  it  in  part  payment  of  the  pur- 
chase price  of  the  patents.  This  fact  they  concealed. 
Subscribers  for  stock  in  the  new  company  paid  $7.00 
a  share  to  the  company.  The  defendants,  as  promo- 
ters, obtained  their  stock  without  consideration.  The 
case  was  that  of  a  secret  gift  to  the  promoters  of  the 
company  from  the  vendors  of  the  patents.  By  reason  of 
their  fiduciary  relation  towards  the  new  company  at  the 
time  of  the  purchase  of  the  patents  by  it,  they  could  not 
secretly  participate  in  the  profit  of  the  transaction,  and 
were  accountable  to  the  company  for  the  profits  received 
by  them. 

§  73.  In  re  Westmoreland  Green  and  Blue  Slate  Co. 1  — 
Poole  and  Binns  were  interested  in  certain  quarries  which 
they  were  desirous  of  making  over  to  a  company  to  be 
formed  for  the  purpose.  They  employed  Ashworth  and 
Bland  to  assist  them  in  getting  up  the  company.  By  an 
agreement  of  the  16th  of  February,  1886,  Poole,  Binns, 
Ashworth,  and  Bland  entered  into  an  agreement  to  hand 
over  the  quarries,  among  which  was  that  known  as  Stone 
Dykes,  to  the  proposed  company  in  consideration  of  £2,600 
in  cash  and  £4,000  in  fully  paid-up  shares,  of  which  Bland 
and  Ashworth  were  each  to  receive  120.  On  the  same  day 
a  lease  of  Stone  Dykes  quarry,  a  lease  of  which  Poole  was 
entitled  to  call  for,  was  granted  to  the  four  promoters. 
The  company  was  formed.  The  agreement  was  made  by 
the  promoters,  as  vendors,  with  a  trustee  for  the  intended 
company,  the  quarries  were  transferred  to  it,  and  Binns 
and  Ashworth  received  their  shares.  The  company  was 
subsequently  wound  up.  In  the  course  of  the  winding  up, 
Bland  was  examined.  He  admitted  that  up  to  the  16th  of 
February,  1886,  he  had  no  interest  in  Stone  Dykes,  and 

1  2  Ch.  (1893)  612. 
6 


82  PROMOTERS  AND   PROMOTION  OF  CORPORATIONS. 

that  he  had  nothing  to  do  with  fixing  the  purchase  money. 
An  order  was  made  that  Bland  should  contribute  to  the 
assets  of  the  company  the  par  value  of  the  120  shares 
received  by  him.  It  was  contended  for  Bland  that  he  ren- 
dered services  to  Poole,  for  which  Poole  gave  him  an 
interest  in  the  property  sold,  and  he  was  therefore  a  real 
vendor.  The  Court,  however,  regarded  the  transaction  as 
"a  novel  and  ingenious  attempt  to  evade  the  law  as  to 
secret  profits."  If  Ash  worth  and  Bland  had  been  lona  fide 
owners  of  shares  in  Stone  Dykes,  and  had  been  agreeing  to 
sell  their  interests  for  shares  in  the  new  company,  the 
transaction  could  not  have  been  impeached.  But,  as  the 
Court  observed,  "  This  was  nothing  but  a  scheme  to  enable 
Bland  and  Ashworth  to  get  from  the  company  120  paid-up 
shares  each  for  their  services  in  getting  up  the  company." 

§  74.  In  Yale  Gas  Stove  Co.  v.  Foley,1  —  Foley,  the 
owner  of  a  patent,  entered  into  an  agreement  with  Wilcox, 
by  which  the  latter  was  to  organize  a  corporation  to  purchase 
and  work  it,  and  Foley  was  to  transfer  the  patent  to  it  for 
a  certain  consideration,  one-half  of  which  he  was  to  turn 
over  to  Wilcox  for  his  services.  Wilcox  proceeded  to  form 
the  corporation,  and  obtained  subscriptions  for  its  stock. 
He  became  a  director,  the  purchase  of  the  patent  was  con- 
summated, and  one-half  of  the  purchase  price  was  turned 
over  to  him  by  Foley.  He  was  compelled  to  account  to 
the  corporation  for  it.  His  agreement  with  Foley  was  con- 
cealed. This  agreement  contained  a  provision  that  upon 
the  organization  of  the  corporation  Foley  would  assign  one- 
half  of  his  interest  in  the  patent  to  Wilcox.  In  view  of 
this,  it  was  contended,  on  the  authority  of  Ladywell  Mining 
Go.  v.  Brooks?  that  Wilcox  had  acquired  an  interest  in  the 
patent  before  he  became  a  promoter  of  the  corporation,  and 
therefore  was  not  accountable  for  his  profit ;  but  it  was 

1  64  Conn.  105.  2  35  Ch.  D.  400. 


ACCOUNTABILITY   OF  PROMOTERS  TO  CORPORATION.        83 

found,  as  matter  of  fact,  that  the  patent  was  transferred  by 
Foley  to  the  corporation,  and  that  the  agreement  did  not 
contemplate  the  acquisition  by  Wilcox  of  any  title  to  the 
patent,  but  simply  the  organization  of  a  corporation  by  him, 
the  sale  to  it  of  the  patent,  and  then  a  division  between  Foley 
and  himself  of  the  avails  of  the  sale.  The  case,  therefore, 
was  that  of  a  promoter  of  a  corporation  who  has  received  a 
secret  commission  from  a  vendor  of  the  corporation. 

§  75.  Right  of  corporation  to  recover  from  vendor  promo- 
tion money  which  he  has  secretly  agreed  to  pay  to  promoter. 
—  The  corporation  may  recover  from  the  vendor  any  pro- 
motion money  which  may  be  in  his  hands  under  a  secret 
agreement  that  it  is  to  be  turned  over  to  a  promoter.  Thus 
in  Whaley  Bridge  Calico  Printing  Co.  v.  Grreen?  it  appeared 
that  Green  had  purchased  certain  calico  printing  works  for 
£  15,000.  Green  and  Smith  associated  themselves  together 
as  promoters  of  a  company  formed  for  the  purchase  of  the 
works  from  Green,  and  for  the  purposes  of  the  negotiations 
for  such  purchase,  a  contract,  which  the  jury  found  to  be  a 
sham  contract,  was  entered  into  between  them  for  the  pre- 
tended sale  of  the  works  by  Green  to  Smith  for  £20,000. 
The  company  was  ultimately  formed,  its  directors  being 
nominees  of  Green  and  Smith  and  the  works  were  con- 
veyed by  Green  and  Smith  to  the  company  for  £20,000. 
It  was  agreed  between  Green  and  Smith  that  the  former 
should  pay  the  latter  £3,000  out  of  the  purchase  money, 
but  this  agreement  was  not  communicated  to  the  directors 
of  the  company  when  the  sale  to  the  company  was  effected. 
It  was  held  that  the  company  was  entitled  to  treat  the  agree- 
ment stated  as  made  by  Smith  in  its  behalf,  and  to  enforce 
it  against  Green,  and  that  it  could  recover  from  Green  so 
much  of  the  £3,000  which  he  had  agreed  to  pay  to  Smith 
as  he  had  not  turned  over  to  him.  Mr.  Justice  Bowen  said : 

1  5  Q.  B.  D.  109. 


84  PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

"  In  many  unexecuted  contracts  the  principal  could  not 
substitute  himself  in  the  agent's  place,  as  the  person  for 
whose  benefit  the  contract  was  to  be  performed,  without 
altering  substantially  the  character  of  the  contract.  But 
when  nothing  has  to  be  done  under  the  contract  but  payment 
of  money  to  the  agent,  I  think  that  the  principal,  under  cir- 
cumstances such  as  these,  is  entitled  to  stand  in  the  agent's 
shoes  and  compel  a  payment  of  money  directly  to  himself." 

The  promoter  himself  cannot  in  such  a  case  enforce  a 
secret  agreement  by  a  vendor  to  pay  him  for  his  services 
as  a  promoter.1  Such  an  agreement  is  not  in  itself  illegal, 
provided  it  is  not  to  be  kept  secret  from  the  company, 
when  the  company  is  induced  to  negotiate  with  the  vendor  ; 
but  the  element  of  secrecy  makes  it  corrupt  as  between  the 
parties  to  it.2 

§  76.  Accountability  to  corporation  of  persons  confederating 
with  promoters.  —  Persons  who  are  not  promoters,  but  who 
knowingly  aid  and  abet  promoters  in  securing  secret  com- 
missions, and  share  in  such  commissions,  become  wrong- 
doers, and  the  corporation  may  compel  them  to  pay  over 
to  it  moneys  which  they  have  thus  received.8  The  corpora- 
tion may  also,  it  would  seem,  recover  from  such  persons 
and  the  promoters,  jointly  or  severally,  damages  for  the 
injury  caused  by  the  wrong-doing.  The  abuse  of  trust  of 
which  the  promoters  are  guilty,  with  the  knowledge  and 
co-operation  of  such  persons,  is  a  wrong  for  which  they  are 
all  liable,  as  the  injury  to  the  corporation  is  the  result  of 
their  combined  action.4 

1  Yale  Gas  Stove  Co.  v.  Wilcox,  64  Conn.  105 ;  Harrington  v.   The 
Victoria  Graving  Dock  Co.,  3  Q.  B.  D.  549. 

2  Whaley  Bridge  Calico  Printing  Co.  v.  Green,  5  Q.  B.  D.  109. 

8  Emery  v.  Parrott,  107  Mass.  95  ;  Fountain  Spring  Park  Co.  v. 
Roberts,  92  Wise.  345. 

4  Boston  v.  Simmons,  150  Mass.  461 ;  Mayor,  frc.  of  Salford  v. 
Lever,  25  Q.  B.  D.  363 ;  affirmed  1  Q.  B.  (1891)  168. 


ACCOUNTABILITY  OF  PROMOTERS  TO  CORPORATION.   85 

§  77.  Right  of  corporation  to  recover  from  promoters  gifts 
and  commissions  not  obtained  at  its  expense.  —  The  rules  in 
relation  to  secret  profits  obtained  by  trustees  or  agents  out 
of  the  matter  of  their  trusteeship  or  agency,  having  been 
quite  generally  extended  to  promoters,  it  would  seem  that 
secret  commissions  or  profits  received  by  promoters  from 
vendors  of  property  to  the  corporation,  in  connection  with 
the  promotion  of  the  corporation,  or  in  consideration  of 
services  rendered  by  them  in  the  course  of  such  promotion, 
ought,  speaking  generally,1  to  be  recoverable  by  the  cor- 
poration from  the  promoters,  although  the  purchase  price 
was  not  swollen  for  the  purpose  of  making  the  corporation 
pay  such  commissions  or  profits.  A  trustee  is  not,  without 
the  knowledge  or  consent  of  his  cestui  que  trust,  permitted 
to  make  any  profit  out  of  the  matter  of  his  trusteeship, 
beyond  his  proper  remuneration  as  trustee.  A  commission 
paid  him  by  persons  with  whom  he  is  dealing,  in  behalf  of 
his  cestui  que  trust,  may  not  originally  come  from  the  funds 
of  the  cestui  que  trust ;  but,  because  the  trustee  is  account- 
able for  it,  it  does  in  effect  come  from  and  is  obtained  at 
the  expense  of  the  cestui  que  trust,  who  may  accordingly 
claim  it.  "  Commission,"  said  James,  L.  J.,2  "  received  by 
an  agent  or  trustee  of  a  purchaser  from  a  vendor,  without 
the  knowledge  of  his  principal,  is,  in  this  Court,  a  bribe  — 
it  is  the  profit  which  the  principal  has  a  right  to  extract 
from  an  agent  whenever  it  comes  to  his  knowledge."  It 
is  not  permissible  for  the  vendor  secretly  to  have  the  agent 
of  the  purchaser  in  his  pay.  The  promoter  is  constructively 
an  agent  or  trustee  for  the  corporation,  and  it  would  seem 
that  ordinarily  the  same  prohibition  ought  to  be  made  in 
his  case.8 

1  See  remarks  of  Lindley,  L.  J.,  quoted  in  Sect.  23. 

2  Phosphate  Sewage  Co.  v.  Hartmont,  5  Ch.  D.  at  p.  457. 

8  But  see  Bagnall  v.  Carlton,  6  Ch.  D.  371,  where  one  of  the  pro- 
moters of  a  corporation  received  from  a  cestui  que  trust  of  certain  prop- 


86  PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

§  78.  In  re  North  Australian  Territory  Co.  —  In  a  recent 
case,1  the  Court  passed  upon  a  secret  arrangement  between 
a  promoter  and  a  director  of  a  corporation  by  which  the 
latter  obtained  an  advantage,  at  the  expense  of  the  corpora- 
tion, in  the  sense  mentioned  in  the  preceding  section.  The 
facts  in  the  case  were  these :  Archer  was  requested  by  the 
promoter  of  a  projected  corporation  to  become  a  director. 
He  agreed  to  do  so  upon  the  terms  that  if  he  should  at  any 
time  desire  to  part  with  the  shares  necessary  for  him  to 
take  to  qualify  him  as  a  director,  the  promoter  should 
take  them  off  his  hands  at  the  price  he  paid  for  them. 
The  corporation  was  subsequently  formed,  and  Archer 
became  a  director,  taking  the  qualification  shares  and  pay- 
ing for  them  at  par  out  of  his  own  money.  His  agreement 
with  the  promoter  was  not  disclosed.  He  afterwards  re- 
signed his  office  of  director,  and,  subsequently  to  his  resig- 
nation, the  promoter,  at  his  request,  paid  to  him  the  sum 
which  he  had  paid  for  the  shares,  and  accepted  a  transfer 
of  them.  At  that  time  the  shares  were  valueless  in  the 
market.  In  the  winding  up  of  the  corporation,  the  liquida- 
tors asked  that  Archer  be  ordered  to  pay  to  them  the  sum 
received  by  him  from  the  promoter,  with  interest.  It  was 
held  that  whatever  benefit  accrued  to  him  under  the  in- 
demnity constituted  by  his  secret  agreements  with  the  pro- 
moter belonged  to  the  corporation,  and  that  the  retention 
by  him  of  the  proceeds  of  the  indemnity  occasioned  a  loss 
to  the  corporation  for  which  he  was  accountable,  with 
interest,  upon  the  principle  of  Hay's  Case  and  Pearson's 

erty  sold  to  the  corporation  £1500  as  a  commission  agreed  to  be  paid 
to  him  in  case  he  found  a  purchaser  for  the  property.  It  was  held 
that  he  was  not  accountable  to  the  corporation  for  this  sum,  on  the 
ground  that  it  was  not  paid  out  of  the  purchase  money,  but  by  one  of 
the  parties  beneficially  interested  in  the  property,  in  respect  of  a  per- 
sonal liability,  and  out  of  his  own  pocket. 

1  In  re  North  Australian  Territory  Co.,  1  Ch.  (1892)  322. 


ACCOUNTABILITY   OF   PROMOTEES   TO   CORPORATION.        87 

Case.1  The  following  colloquy  between  the  Court  and 
counsel  for  Archer,  which  occurred  during  the  argument, 
is  instructive  :  Fry,  L.  J. :  "  Why  should  not  Archer  be 
accountable  for  the  £500,  as  property  of  the  company  re- 
tained by  him  ?  "  Counsel :  "  The  real  question  is,  Did  the 
company  suffer  loss  by  what  was  done  ?  They  never  had 
the  <£500,  and  therefore  cannot  be  said  to  have  lost  it.  In 
the  majority  of  cases  in  which  a  director  has  been  held 
accountable  to  the  company  he  has,  in  effect,  received 
money  which  originally  came  from  the  coffers  of  the  com- 
pany, as  in  Hay's  Case,  and  the  cases  already  mentioned." 
Bowen,  L.  J. :  "  Smith,  being  in  a  fiduciary  relation  to  the 
company,  had  no  right  to  give  a  director  a  benefit  without 
the  company  knowing  it.  An  indemnity  against  loss  is  a 
valuable  consideration."  Counsel:  "At  the  time  the  letter 
was  written  Archer  had  not  taken  the  shares,  and  had  not 
then  agreed  to  become  a  director."  Fry,  L.  J. :  "  Would 
an  honorable  man  assent,  as  Archer  did,  to  accepting  this 
indemnity,  on  the  terms  that  he  was  to  keep  it  secret  ?  If 
it  was  not  actually  dishonest,  it  seems  to  me  to  be  a  very 
improper  course  of  proceeding."  Bowen,  L.  J. :  "  Is  it 
right  that  the  wolf  should  give  a  sop  to  the  watch-dog, 
without  his  master's  leave?"2 

1  Supra,  Sect.  64. 

2  The  case  of  a  solicitor  who  is  a  trustee  under  a  will  or  deed  which 
contains  no  power  to  charge  for  professional  services,  furnishes  an  ex- 
ample of  the  severity  of  the  rule  applied  to  trustees.     Such  a  so- 
licitor trustee  is  not  entitled  to  fees  for  legal  services  rendered  by  him 
in  the  administration  of  the  trust.     In  Broughton  v.  Broughton,  5  De 
G.  M.  &  G.   160,  in  which  this  question  was  presented,  Lord  Cran- 
worth  said:     "The  rule  applicable  to  the  subject  has  been  treated 
at  the  bar  as  if    it  were  sufficiently  enunciated  by  saying  that  a 
trustee  shall  not  be  able  to  make  a  profit  out  of  his  trust;  but  that  is 
not  stating  it  so  widely  as  it  ought  to  be  stated.     The  rule  really  is 
that  no  one  who  has  a  duty  to  perform  shall  place  himself  in  a  situa- 
tion to  have  his  interests  conflicting  with  that  duty.  .  .  .  No  person 


88  PROMOTERS  AND   PROMOTION   OF   CORPORATIONS. 

in  whom  fiduciary  duties  are  vested  shall  make  a  profit  of  them  by 
employing  himself,  because  in  doing  this  he  cannot  perform  one  part 
of  his  trust,  namely,  that  of  seeing  that  no  improper  charges  are 
made."  See  Sherman  v.  White  (Illinois),  28  Chicago  Legal  News,  199, 
holding  that  a  trustee  cannot  be  allowed  to  retain  commissions,  re- 
ceived by  him  as  a  member  of  a  board  of  underwriters,  for  placing  in- 
surance on  the  trust  estate,  although  it  appears  that  he  could  not  have 
obtained  insurance  at  any  less  rate.  In  a  recent  valuable  little  work 
on  trustees,  the  author,  speaking  of  the  rule  referred  to,  says:  "It 
has  been  applied  by  the  Courts  of  Equity  fearlessly  —  not  only  to 
trustees  of  the  kind  we  are  now  speaking  of,  but  to  all  persons  who 
stand  in  a  fiduciary  relationship  to  others.  Nor  is  the  present  time 
one  when  either  Parliament  or  judges  are  likely  to  relax  the  pressure 
of  the  rule  in  any  single  respect.  The  habit  of  secret  commissions 
given  and  taken  every  day  (so  at  least  it  is  confidently  asserted)  by 
persons  in  good  positions,  who  account  themselves,  and  are  accounted, 
honest  men,  is  one  to  be  scorned  by  Courts  of  law.  It  is  the  plain 
duty  of  legislators  and  judges  to  hand  down  from  one  generation  to 
another  (so  far  as  they  can)  untarnished,  and  of  full  authority,  those 
principles  of  absolute  integrity  to  those  who  employ  you,  or  on  whose 
behalf  you  profess  to  act,  which  are  not  only  compatible  with  pros- 
perity, but  are  essential  to  commercial  greatness  and  well  established 
success."  Bissell  on  the  Duties  and  Liabilities  of  Trustees,  66. 


PKOFITS  RECOVERABLE  BY  CORPORATION. 


89 


CHAPTER  IV. 

MEASURE  OP  PROFITS  RECOVERABLE  BY  CORPORATION.  — 
STATUTE  OF  LIMITATIONS  AS  A  BAR  TO  SUIT  FOR  THEIR 
RECOVERY. — SURVIVAL  OF  CAUSE  OF  ACTION. 


i  79.     View  that  net  profit  only  re- 
coverable. 

80.  Modification  of  this  view. — 

No  allowance  for  expendi- 
tures ultra  vires  the  corpo- 
ration. 

81.  English  decisions    based   on 

provisions  of  the  Compa- 
nies Acts. 

82.  Interest  recoverable. 

83.  Rule  when  gift,  commission, 

or  profit  is  in  form  of  shares 
of  corporation's  stock. 

84.  Statute  of  Limitations  as  a  bar 

to  suit  to  recover  profits. 


§  85.    Metropolitan  Bank  v.  Heiron, 
5  Ex.  D.  319. 

86.  Statute  runs  from  time  of  dis- 

closure to  or  knowledge  by 
corporation . 

87.  In  re  Fitzroy  Bessemer  Steel 

Co.  v.  Smith,  60  L.  T.  Rep. 
N.  s.  144. 

88.  Right  of  action  not  divested 

short  of  period  of  statute 
without  accord  and  satisfac- 
tion or  release  under  seal. 

89.  Right    of     action     survives 

against  personal  represen- 
tatives of  promoters. 


§  79.  View  that  net  profit  only  recoverable.  —  When  a 
promoter  is  called  upon  to  account  to  the  corporation  for 
promotion  money,  or,  in  case  he  is  a  vendor  of  the  corpo- 
ration, for  the  profit  made  by  him  in  the  sale,  he  cannot, 
according  to  the  English  decisions,  claim  as  of  right  any 
commission  or  payment  for  his  services  in  promoting  the 
corporation,  but  may  retain  the  amount  of  his  proper  dis- 
bursements for  costs  and  expenses  in  such  promotion.  In 
Emma  Silver  Mining  Co.  v.  Grant}  it  was  said  by  Sir 
George  Jessel,  Master  of  the  Rolls,  that  the  broad  view  of 
the  case  is  to  take  the  whole  transaction,  and  see  how  much 
more  money  the  promoter  has  got  than  he  would  have  had, 
if  he  had  never  entered  into  it  at  all.  Adopting  this  view, 
the  Master  of  the  Rolls  held  that,  if  a  promoter  has  ex- 
pended money  in  good  faith  to  promote  the  corporation, 


1  11  Ch.  D.  at  p.  938. 


90  PROMOTERS  AND   PROMOTION   OF  CORPORATIONS. 

the  Court  will  not  inquire  into  the  propriety  or  morality 
of  his  expenditures  ;  and  he  allowed  Grant  for  money  paid 
by  him  to  persons  who  procured  directors  for  the  corpora- 
tion, for  shares  furnished  to  qualify  the  directors,  for  money 
paid  to  brokers  to  sustain  the  price  of  the  shares  in  the  mar- 
ket, to  persons  connected  with  the  press  for  puffing  or  lau- 
datory statements  respecting  the  corporation  and  its  mine, 
and  to  certain  brokers  as  a  consideration  for  their  waiver  of 
an  option  to  purchase  shares.1 

§  80.  Modification  of  this  view. —  No  allowance  for  expendi- 
tures ultra  vires  the  corporation.  —  The  view  thus  laid  down 
has  not,  however,  been  accepted  without  qualification.  It 
has  been  modified  to  this  extent,  that  the  expenditures  to 
be  allowed  must  be  such  as  do  not  involve  a  misapplication 
of  the  corporation's  funds,  or  amount  to  acts  ultra  vires  the 
corporation.2  In  Lydney  $  Wigpool  Iron  Ore  Co.  v.  Bird? 
the  Court  of  Appeal,  while  allowing  the  defendant  Bird  for 
expenses  incurred  by  him  in  the  promotion  of  the  company, 
such  as  advertisements,  printing,  solicitors'  and  brokers' 
charges,  refused  to  allow  him  the  sum  of  £5,000  which  he 
had  paid  for  a  guarantee  of  the  subscription  of  the  capital 
of  the  company.  In  a  later  case,*  the  same  Court  held  that 
it  was  not  ultra  vires  the  corporation,  nor  an  improper  ex- 
penditure of  its  funds,  to  pay  brokers  a  reasonable  and  usual 
commission  for  placing  the  corporation's  shares.  The  case 
was  distinguished  from  Lydney  $  Wigpool  Iron  Ore  Co.  v. 
Bird,  Lindley,  L.  J.,  saying  of  that  case :  "  The  money 
there  sought  to  be  recovered  was  not  money  which  was  paid 

1  See  also  Bagnall  v.  Carlton,  6  Ch.  D.  371. 

a  In  re  Faure  Electric  Accumulator  Co.,  40  Ch.  D.  141;  Capel  v. 
Sims  Ships  Compositions  Co.,  57  L.  J.  Ch.  713;  Lydney  &f  Wigpool 
Iron  Ore  Co.  v.  Bird,  33  Ch.  D.  85. 

8  33  Ch.  D.  85. 

*  Metropolitan  Coal  Consumers'  Association  v.  Scrimgeour,  2  Q.  B. 
(1895)  604. 


PROFITS  RECOVERABLE  BY  CORPORATION.       91 

by  the  company  for  placing  shares.  There  was  a  person 
named  James  Bird,  who  was  a  promoter  of  the  company, 
and  he  secretly  made  a  profit,  at  the  expense  of  the  com- 
pany, of  £10,800.  He  was  made  liable  for  it.  He  said, 
4  Well,  I  have  spent  £5,000  as  a  consideration,  which  I 
gave  to  William  Bird  for  guaranteeing  me  that  shares 
should  be  taken  up  in  this  company,'  and  we  disallowed 
James  Bird  that  bill.  The  whole  thing  was  a  juggle  from 
beginning  to  end  ;  and  we  disallowed  it  on  the  ground  that 
it  was  an  improper  transaction,  —  and  so  it  was.  It  has 
nothing  whatever  to  do  with,  and  is  far  away  and  remote 
from,  such  a  case  as  this  where  there  is  no  juggle  and  no 
impropriety  at  all." 

§  81.  English  decisions  based  on  provisions  of  the  Companies 
Acts.  —  In  reading  the  English  cases  on  this  subject,  it 
should  perhaps  be  noted  that  under  the  English  Companies 
Act,1  the  directors  of  a  company  may  pay  all  expenses  in- 
curred in  getting  up  and  registering  the  company.  Yet, 
while  the  Act  confers  the  power,  it  does  not  impose  an  obli- 
gation to  pay  such  expenses  when  incurred  by  promoters ; 
and  it  would  seem  that,  in  the  absence  of  legislation  of  the 
nature  stated,  payment  from  the  funds  of  the  corporation  of 
the  fair  and  reasonable  expenses  incident  to  its  formation 
is  not  improper  or  beyond  the  powers  of  the  corporation. 
Assuming  this  to  be  so,  it  would  appear  to  be  equitable,  in 
an  accounting  between  the  promoter  and  the  corporation, 
to  allow  the  promoter  all  legitimate  expenses  incurred  by 
him  in  the  work  of  organization  and  securing  the  capital.2 

1  Table  A.  paragraph  55. 

2  In  Sherman  v.  White  (Illinois),  28  Chicago  Legal  News,  199,  a 
trustee  who  had,  as  a  member  of  a  board  of  underwriters,  received  com- 
missions for  placing  insurance  on  the  trust  estate,  was  compelled  to  ac- 
count for  them,  but  was  allowed  in  the  accounting  six  hundred  dollars 
paid  by  him  for  membership  dues  in  the  underwriters'  association  dur- 
ing the  period  in  which  he  received  the  commissions. 


92     PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

§  82.  Interest  recoverable.  —  When  one  has  in  his  hands 
money  of  another,  which  he  has  obtained  by  fraud,  or 
wrongfully  retains  money  which  he  ought  to  pay  over  to 
another,  interest  may  be  recovered  thereon,  by  way  of  dam- 
ages, for  the  breach  of  an  implied  promise  to  pay  it  over. 
Promoters  who  are  accountable  to  the  corporation  for 
profits  or  commissions  are  accordingly  chargeable  with 
interest  on  that  which  is  withheld  by  them  from  the  time 
it  is  withheld.1 

§  83.-  Rule  when  gift,  commission,  or  profit  is  in  form  of 
shares  of  corporation's  stock.  —  When  the  profit  or  commis- 
sion is  in  the  form  of  shares  of  the  capital  stock  of  the  cor- 
poration, the  corporation  may,  at  its  option,  pursue  one  of 
three  courses.  It  may  compel  the  promoter,  if  he  has  not 
parted  with  the  shares,  to  transfer  them  to  it,  and  to  account 
for  any  dividends  he  may  have  received  thereon.2  Al- 
though he  has  not  transferred  the  shares,  or  sold  them  at  a 
profit,  the  corporation  may  compel  him  to  pay  the  highest 
market  value  attained  by  the  shares  between  the  time  of 
their  delivery  to  him  and  the  time  when  knowledge  of  the 
fact  of  such  delivery  came  to  the  corporation,  with  interest. 
The  right  to  such  recovery  rests  upon  the  theory  that  the 
corporation  has  been  deprived  of  the  right  of  placing  the 
shares  with  other  persons,  and  that  for  the  loss  occasioned 
thereby  the  promoter  is  accountable.8 

1  Mason  v.  Waite,  17  Mass.  560  ;  Manufacturers'  National  Bank  v. 
Perry,  144  Mass.  313 ;  Greenly  v.  Hopkins,  10  Wend.  96. 

2  Chandler  v.  Bacon,  30  Fed.  Rep.  538. 

8  McKay's  Case,  2  Ch.  D.  1  ;  Pearson's  Case,  5  Ch.  D.  336  ;  De 
Ruvigne's  Case,  5  Ch.  D.  306  ;  In  re  Fitzroy  Bessemer  Steel  Co.,  50 
L.  T.  Rep.  N.  s.  144  ;  Eden  v.  Ridsdale's  Ry.  Lamp  &  Lighting  Co., 
23  Q.  B.  D.  371 ;  Huntington  if  Broad  Top.  Ry.  fr  Coal  Co.  v.  English, 
86  Penn.  247  ;  North  v.  Phillips,  89  Penn.  250  ;  Galigher  v.  Jones,  129 
U.  S.  193;  Wright  v.  Bank  of  the  Metropolis,  110  N.  Y.  237.  The  rule 
of  highest  intermediate  value  has  been  in  many  jurisdictions  adopted  in 


PROFITS  RECOVERABLE  BY  CORPORATION.       93 

Thus,  in  Chandler  v.  Bacon,1  the  promoters  of  a  corpora- 
tion received  as  a  secret  gift  from  the  vendor  of  the  corpo- 
ration certain  of  the  shares  issued  to  such  vendor  in  payment 
for  a  patent  transferred  by  him  to  the  corporation.  It  ap- 
peared in  evidence  that  a  large  amount  of  the  stock  of  the 
company  had  been  taken  by  the  public  at  a  uniform  price 
of  $7.00  per  share.  It  was  held  that  the  promoters  must 
account  to  the  corporation  for  their  stock  at  this  price. 
In  Nant-y-Cilo  $  Blaina  Iron  Works  Co.  v.  Grave,2  a 
promoter  improperly  obtained  shares  of  the  corporation 
in  1871,  and  held  them  when  suit  was  brought  against  him 
by  the  corporation  in  1877.  They  were  then  worth  £1  per 
share.  The  highest  market  price  which  they  had  attained 
in  the  interval  was  <£80.  It  was  held  that  the  promoter 
must  account  for  the  shares  at  the  price  of  X80,  with  inter- 
est from  the  time  that  he  received  them.  If  the  promoter 
has  sold  the  shares,  the  corporation  may  require  him  to  pay 
the  amount  he  has  realized  therefrom,  and  the  amount  of 
dividends  he  has  received  with  interest.3 

When  the  promoters  have  combined  or  confederated  in 
a  scheme  to  secure  secret  profits  improperly  at  the  expense 
of  the  corporation,  they  may  be  held  jointly  liable  in  a  suit 
by  the  corporation  to  recover  such  profits.4 

§  84.  Statute  of  limitations  as  a  bar  to  suit  to  recover 
profits.  —  It  is  true  that  no  time  will  bar  a  suit  by  a  cestui 

the  ordinary  action  for  conversion  of  shares  of  stock.  In  some  States 
it  has  been  repudiated.  The  objection  urged  is  that  ordinarily  it  is 
mere  conjecture  that  the  owner  would  have  obtained  the  highest  in- 
termediate value ;  the  presumption  that  the  owner  would  have  dis- 
posed of  his  shares  when  they  reached  the  highest  price,  would  rarely, 
it  is  said,  accord  with  fact.  The  subject  is  well  treated,  and  the  cases 
are  collected  and  classified  in  Hale  on  Damages,  186,  et  seq. 

1  30  Fed.  Rep.  538. 

2  12  Ch.  D.  738. 

8  In  re  Fitzroy  Bessemer  Steel  Co.,  50  L.  T.  Rep.  N.  s.  144. 
4  Chandler  v.  Bacon,  30  Fed.  Rep.  538. 


94  PROMOTERS   AND   PROMOTION  OF  CORPORATIONS. 

que  trust  against  his  trustee  when  the  trustee  has  a  fund  in 
his  possession  and  wrongfully  wastes  it.  Express  trusts 
are  not  within  the  Statute  of  Limitations,  because  the  pos- 
session of  the  trustee  is  presumed  to  be  the  possession  of 
the  cestui  que  trust  until  the  trustee  duly  discharges  him- 
self.1 But  the  statute  is  available  as  a  bar  in  cases  of  con- 
structive trusts,  as  where  one  has  received  money  in  his 
own  right,  and  is  afterwards  by  construction  held  to  have 
received  it  as  a  trustee  for  another  whose  right  to  it  is  thus 
established.2  Money  or  property  improperly  obtained  by  a 
promoter  as  a  profit,  gift,  or  commission,  is  not  the  money 
or  property  of  the  corporation  unless  it  is  made  so  by  a 
decree  founded  on  the  act  by  which  the  promoter  obtained 
the  money  or  property.  The  case  of  the  promoter  is  there- 
fore that  of  a  constructive  trust.  His  liability  is  a  debt 
differing  from  ordinary  debts  only  in  the  fact  that  it  is 
equitable ;  and  in  dealing  with  equitable  debts  of  such  a 
nature,  Courts  of  Equity  follow  by  analogy  the  provisions 
of  the  Statute  of  Limitations.3 

§  85.  In  Metropolitan  Bank  v.  Heir  on,4  —  an  action  was 
brought  by  a  company  in  1879  against  a  former  director  to 
recover  £250,  on  the  ground  that  the  defendant  had  re- 
ceived that  sum  from  a  debtor  to  the  company  as  a  bribe  to 
induce  him  to  use  his  influence  to  obtain  favorable  terms  of 
compromise  for  the  debtor.  The  allegation  that  the  bribe 
had  been  given,  had,  in  1872,  been  brought  before  the  di- 
rectors at  a  board  meeting ;  they  had  investigated  it  and 
came  to  the  conclusion  that  the  charge  was  unfounded  ; 
and  it  did  not  appear  that  they  had  acted  in  the  matter 

1  Speidel  v.  Henrici,  120  U.  S.  377  ;  Hovenden  v.  Lord  Annesley,  2 
Sch.  &  Lef.  Ch.  621. 

2  Price  v.  Mulford,  107  N.  Y.  303 ;  Baxter  v.  Moses,  77  Me.  465  ; 
AshursCs  Appeal,  60  Penn.  290. 

8  Metropolitan  Rank  v.  Heiron,  5  Ex.  D.  319. 
4  5  Ex.  D.  310. 


PROFITS  RECOVERABLE  BY  CORPORATION.        95 

otherwise  than  in  good  faith.  It  was  held  that  the  action 
was  barred  by  the  Statute  of  Limitations.1 

§  86.  When  statute  begins  to  run. — The  statute  rims 
from  the  time  the  facts  are  made  known  to  or  discovered 
by  the  corporation.  In  cases  of  fraud  the  statute  ordinarily 
runs  from  the  time  of  the  commission  of  the  fraud,  unless 
there  has  been  some  affirmative  act  of  concealment;  but 
when  a  fiduciary  relation  exists  between  the  parties,  it  is 
the  duty  of  the  party  complained  of  to  make  disclosure,  and 
silence  amounts  to  concealment.2  It  is  the  duty  of  a  pro- 
moter who  has  wrongfully  received  a  profit,  gift,  or  com- 
mission to  disclose  the  fact.  His  omission  to  do  so  will 
prevent  the  Statute  of  Limitations  from  running  in  his 
favor  against  the  corporation,  until  the  facts  are  discovered 
by  it.  The  facts  must  be  made  known  to  the  directors,  or, 
if  they  are  implicated,  to  the  shareholders. 

§  87.  In  In  re  Fitzroy  Bessemer  Steel  Co.  v.  Smith,3  —  a 
promoter  of  the  company  made  an  agreement  with  the 
syndicate  of  vendors,  by  which  he  was  to  receive  1,000  B 
shares  in  the  company,  in  consideration  of  his  taking  or 
placing  500  A  shares.  The  agreement  was  subsequently  car- 
ried out.  Notice  of  this  transaction  was,  after  the  formation 
of  the  company,  given  to  the  directors  ;  but  the  board  which 
received  the  notice  consisted  of  persons  more  or  less  impli- 
cated in  the  transaction,  and  no  action  was  taken  in  the 
matter.  The  company  was  afterwards  wound  up,  and  the 
liquidators  sought  to  recover  from  Smith  the  value  of 
the  1,000  B  shares,  on  the  ground  that  his  having  received 
them  under  the  circumstances  was  a  misfeasance  against 
the  company.  It  was  contended  that  the  claim  was  barred 

1  See  also  De  Bussche  v.  Ah,  8  Ch.  D.  286. 

2  Atlantic  Bank  v.  Harris,  118  Mass.  147  ;   Wickersham  v.  Lee,  83 
Penn.  416. 

8  50  L.  T.  Rep.  N.  s.  144. 


96     PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

by  the  Statute  of  Limitations,  the  company  having  through 
its  directors  received  notice  of  the  transaction  more  than 
six  years  previously.  It  was  held  that,  though  notice  to 
the  directors  is  prima  facie  notice  to  the  company,  yet  it 
was  not  notice  in  this  case,  it  being  certain  that  the  direc- 
tors would  not  communicate  the  information  to  the  stock- 
holders, and  that  accordingly  the  claim  was  not  barred  by 
the  statute. 

§  88.  What  -will  divest  right  of  action  within  period  of 
statute.  —  While  the  Statute  of  Limitations  may  be  a  bar 
to  a  suit  by  the  corporation  to  recover  secret  profits,  when 
the  corporation  is  entitled  to  claim  such  profits,  the  right  of 
action  vested  in  it,  cannot,  for  a  period  short  of  the  statute, 
be  divested  without  accord  and  satisfaction  or  a  release 
under  seal.  An  express  promise  not  to  sue  could  not  in 
itself  constitute  a  bar  to  proceedings,  for  the  promise  would 
be  without  consideration  and  therefore  not  binding.  But 
there  might  be  estoppel  by  conduct.1 

§  89.  Right  of  action  survives  against  personal  representa- 
tives of  promoters.  —  A  claim  for  secret  profits  against  a 
promoter,  being  founded  on  breach  of  a  fiduciary  duty,  will 
survive  against  the  personal  representatives  of  the  pro- 
moter.2 And  this  holds  good  as  against  a  promoter  who 
has  not  himself  participated  in  such  profits,  but  has  been 
a  party  to  the  scheme  by  which  they  were  obtained,  and 
were  appropriated  by  his  co-promoters.  The  principle  on 
which  this  rests  is  illustrated  in  Walsham  v.  Stainton? 
Here  A.  and  R,  who  were  in  a  fiduciary  relation  to  a 

1  De  Bussche  v.  Alt,  8  Ch.  D.  286. 

2  New  Sombrero  Phosphate  Co.  v.  Erlanger,  5  Ch.  D.  73  ;  Ramskill 
v.  Edwards,  31  Ch.  D.  100  ;  Phillips  v.  Horn/ray,  24  Ch.  D.  439,  11 
App.  Cas.  466 ;  Batthyany  v.    Walford,  36  Ch.  D.   269  ;    Concha  v. 
Murietta,  40  Ch.  D.  543  ;    Warren  v.  Para  Rubber  Shoe  Co.,  166  Mass. 
97. 

8  1  De  G.  J.  &  S.  678. 


PKOFITS  RECOVERABLE  BY  CORPORATION.       97 

partnership,  combined  together  fraudulently  to  obtain  the 
shares  of  the  partners  at  an  undervaluation.  A.  was  a  party 
to  the  fraud,  but  the  whole  benefit  of  it  accrued  to  B.  It 
was  held  that  A.'s  estate  was  liable,  though  not  benefited.1 

1  An  action  for  damages  for  false  and  fraudulent  representations 
(e.  g.,  in  a  prospectus  issued  by  the  directors  of  a  corporation  inviting 
subscriptions  for  shares)  will  not,  in  the  absence  of  a  fiduciary  rela- 
tion, survive  against  the  personal  representatives  of  the  person  com- 
mitting the  fraud,  unless  they  have  received  an  estate  benefited  by  the 
fraud.  HamUy  v.  Trott,  1  Cowp.  371  ;  Peek  v.  Gurney,  L.  R.  6  H.  L. 
377,  392-395;  Houghton  v.  Butler,  166  Mass.  547.  See  the  valuable 
English  and  American  Notes  in  2  English  Ruling  Cases,  at  p.  14. 
The  right  of  action  of  a  person  who  has  been  deceived  by  fraudulent 
misrepresentations  survives,  if  an  injury  has  accrued  to  his  personal  es- 
tate. Twycross  v.  Grant,  4  C.  P.  D.  40  ;  48  L.  J.  (Q.  B.)  1  ;  Hatchard 
v.  Mege,  18  Q.  B.  D.  771.  In  most  of  the  States  there  is  legislation 
as  to  the  survival  of  actions,  which  affects  the  common-law  rule. 


98 


PROMOTERS  AND   PROMOTION   OF  CORPORATIONS. 


CHAPTER  Y. 

BREACH  OP  DUTY  OR  FRAUD  BY  PROMOTERS  AS  GROUND 
FOR  RECOVERY  OF  DAMAGES  FROM  THEM  BY  CORPORATION, 
AND  FOR  PROCURING  THE  SETTING  ASIDE  OF  EXECUTED 
CONTRACTS  ENTERED  INTO  BY  IT. 

ARTICLE  I.  —  Liability  of  Promoters  in  Damages  to  the 
Corporation. 

ARTICLE  II.  —  Rescission  by  Corporation    of    Contracts 
entered   into   by  it  with   or   through   Promoters. 

ARTICLE  I.  —  LIABILITIES  OP    PROMOTERS   IN  DAMAGES   TO   THE 
CORPORATION. 


§  90.    Rule  laid  down  in  Taylor  on 

Corporations. 

91.  Damages  recoverable  for 
breach  of  duty  damnifying 
corporation. 


§  92.  Instances  where  promoters 
liable  to  corporation  in 
damages. 


§  90.  Rule  laid  down  in  Taylor  on  Corporations.  —  The 
author  of  a  work  of  authority  on  corporations,1  observing 
that  "  the  relationship  existing  between  the  promoters  and 
the  corporation  as  subsequently  organized  is  a  fiduciary 
relationship  regulated  by  legal  and  equitable  principles 
in  many  respects  similar  to  those  applicable  to  the  re- 
lationship of  agency,"  adds,  "but  not  in  every  respect, 
for  the  corporation,  in  the  nature  of  things,  not  having 
entrusted  its  property  to  the  promoter,  never  having  em- 
ployed the  promoter  to  act  for  it,  and  not  being  bound 
by  his  contracts  unless  it  ratifies  or  voluntarily  accepts 
the  benefit  of  them  after  its  incorporation,  could  ordinarily 
bring  no  such  action  against  a  promoter  for  misfeasance 

1  Taylor  on  Corporations,  2d  ed.,  Sect.  82,  n.  1. 


BREACH  OF  DUTY  OR  FRAUD  BY  PROMOTERS.      99 

as  a  corporation  could  bring  against  one  of  its  officers. 
A  promoter,  to  be  sure,  would  be  liable  to  the  corporation 
in  damages  for  any  fraud  committed  by  him,  in  contract- 
ing with  it,  of  a  nature  that  would  render  one  individual 
liable  under  ordinary  circumstances  to  another.  But 
usually  the  only  action  maintainable  by  a  corporation 
against  its  promoters  is  an  action  to  make  them  disgorge 
secret  profits." 

§  91.  Damages  recoverable  for  breach  of  duty  damni- 
fying corporation.  —  It  would  seem,  however,  that  mis- 
feasance by  a  promoter,  when  in  the  nature  of  a  breach 
of  duty  and  an  act  resulting  in  pecuniary  loss  to  the 
corporation,  will  ground  an  action  by  the  corporation 
for  damages.  When  a  trustee  commits  a  breach  of  duty, 
as,  for  example,  by  accepting  a  secret  bribe,  he  cannot 
acquit  himself  of  all  obligation  by  giving  up  that  which 
he  has  received.  He  must  pay  the  damages  occasioned 
by  his  wrongful  conduct.1  Special  duties  similar  to  some 
of  those  imposed  upon  trustees  rest  upon  promoters.  It 
is  a  familiar  principle  that  when  the  law  imposes  upon 
one  a  duty,  any  person  to  whom  that  duty  is  owing,  and 
who  suffers  special  injury  from  its  breach,  may  maintain 
an  action  to  recover  his  damages.  If  the  promoter  of 
a  corporation  violates  his  duty  to  it  to  its  injury,  there 
would  seem  to  be  no  reason  why  it  should  not  be  per- 
mitted to  recover  damages  from  him.  It  is  true  that 
the  corporation  is  not  bound  by  the  promoter's  contracts 
made  for  it  prior  to  its  formation  unless  it  adopts  them 
after  it  comes  into  existence ;  but  the  corporation  may  be 
led  to  adopt  such  contracts  by  the  promoter's  non-disclosure 
of  facts  which  it  was  his  duty  to  the  corporation  to  dis- 
close. Again,  the  corporation  may  not  have  entrusted  its 
property  to  the  promoter,  nor  have  employed  him  to  act 

1  Nant-y-Glo  £  Blaina  Iron  Works  Co.  v.  Grave,  12  Ch.  D.  738,  747. 


100        PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

for  it ;  but  the  promoter,  in  fact,  takes  charge  of  its  inter- 
ests, and,  in  so  doing,  the  law  imposes  upon  him  certain 
duties;  if  he  violates  these  duties,  to  the  injury  of  the 
corporation,  it  would  seem  that  he  should  be  liable  to 
it  in  damages.1 

§  92.  Instances  where  promoters  liable  to  corporation  in 
damages.  —  Promoters  are  of  course  liable  in  damages  to 
the  corporation  for  their  frauds  under  the  same  circum- 
stances that  individuals  not  promoters  would  be  liable. 
If  a  sham  contract  of  sale  is  made  to  a  promoter  for 
a  fictitious  price,  whereby  the  corporation  is  induced 
to  pay  more  than  it  would  otherwise  have  done,  an  action 
for  deceit  may  be  maintained  by  the  corporation  against 
the  promoter.2  The  promoters  may  corrupt  the  govern- 
ing body  of  the  corporation,  so  as  to  get  the  corporation 
to  enter  into  a  contract  or  to  purchase  property,  or  they 
may  aid  and  abet  the  corporate  officers  in  defrauding 
the  corporation.  In  such  cases,  the  principle  applied  in 
Mayor,  $c.  of  Salford  v.  Lever,3  a  case  of  agency,  may 

1  Bentinck  v.  Fenn,  12  App.  Cas.  652 ;  Buckley  on  the  Companies 
Acts,  5th  ed.,  545;  Boston  v.  Simmons,  150  Mass.  461.     In  England, 
on  the  winding  up  of  a  company,  the  Court  may,  under  the  procedure 
provided  by  the  Companies  Act,  1890,  assess  damages  against  pro- 
moters for  misfeasance,  and  in  the  course  of  the  proceedings,  a  public 
examination  of  the  promoters  by  the  official  receiver  may  be  had,  in 
which  creditors   or  shareholders  may  take  part  for  the  purpose  of 
eliciting  information  to  be   utilized  in  pending  or  future  litigation 
against  the  promoters.     While  this  act  gives  no  new  rights,  and  sim- 
ply provides  a  summary  mode  of  enforcing  rights,  which  must  other- 
wise have  been  enforced  by  action  (Buckley  on  the  Companies  Acts, 
5th  ed.,  378),  it  removes  a  great  obstacle  to  successful  attacks  upon 
promoters  by  shareholders,  namely,  the  difficulty  in    getting  at  the 
facts  before  beginning  legal  proceedings.     For  an  explanation  of  the 
word  "  misfeasance"  as  employed  in  the  Act,  see  Re  Kingston  Cotton 
Mill  Co.,  2  Ch.  (1896)  279. 

2  Whaley  Bridge  Calico  Printing  Co.  v.  Green,  5  Q.  B.  D.  109. 
8  25  Q.  B.  D.  363,  affirmed  1  Q.  B.  (1891)  168. 


BREACH  OF  DUTY  OR  FRAUD  BY  PROMOTERS.     101 

be  invoked.  There  the  defendant  offered  to  sell  coals  to 
the  plaintiff  corporation,  through  its  agent,  at  a  certain 
price ;  but  the  agent  refused  to  buy  at  the  price  at  which 
the  defendant  was  willing  to  sell,  unless  the  defendant 
would  add  to  the  price  a  shilling-  a  ton,  which,  when 
the  bills  were  paid  by  the  corporation,  was  to  go  to  the 
agent.  The  fraud  on  the  part  of  the  defendant  was  this, 
—  that  "  he  allowed  and  assisted  the  agent  of  the  corpo- 
ration to  put  down  a  false  figure  as  the  price  of  the  coals, 
in  order  to  cheat  the  corporation  out  of  a  shilling  a  ton, 
which  was  to  be  paid  to  their  own  agent ;  and  the  way 
it  was  done  was  this,  —  the  defendant  sent  in  a  bill  to  the 
corporation  for  the  whole  price  thus  increased.  He  got 
the  advanced  price  into  his  hands,  and  then  turned  it 
over  to  the  agent." 1  It  was  held  that  the  corporation 
had  two  distinct  and  cumulative  remedies,  —  to  recover 
from  the  agent  the  bribe  which  he  had  received,  and 
to  recover  from  him  and  the  vendor,  jointly  or  severally, 
damages  for  the  injury  caused  by  the  fraud,2  —  and  that 
in  a  suit  for  damages  against  the  vendor  no  deduction 
was  allowable  in  respect4  of  what  the  company  might 
recover  from  the  agent.3  It  must  appear,  however,  in  order 
to  render  a  person  who  has  contracted  with  a  corporation, 
but  who  is  in  no  fiduciary  relation  to  it,  liable  to  the  corpo- 
ration for  giving  a  share  of  his  profit  to  its  promoters, 
that  there  was  fraud  on  his  part.  If  he  did  not  know, 
or  have  reason  to  know,  that  the  promoters  would  not  make 
proper  disclosure  to  the  corporation,  he  cannot  be  held.4 

1  Per  Lord  Esher. 

2  See  also  Grand  Rapids  Safety  Deposit  Co.  v.  Cincinnati  Safe  8f 
Lock  Co.,  45  Fed.  Rep.  671. 

8  Lands  Allotment  Co.  v.  Broad,  13  Reports,  699. 
4  Cheney  v.  Gleason,  125  Mass.  166. 


102        PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 


ARTICLE    II.  —  RESCISSION  BY  CORPORATION  OF  CONTRACTS   EN- 
TERED INTO  BY  IT  WITH  OR  THROUGH  PROMOTERS. 


1 93.    Rescission    an  elective  rem- 
edy. 

94.  Rescission    of    contracts    on 

ground  of  breach  of  duty 
by  promoters. 

95.  Erlanger   v.  New    Sombrero 

Phosphate  Co.,  3  App.  Gas. 
1218. 

96.  Atwool    v,   Merryweather,  5 

Eq.  464,  n. 

97.  Phosphate     Sewage    Co.    v. 

Hartmont,  5  Ch.  D.  394. 

98.  Caveat  emptor  not  applicable 

to    dealings   by  promoters 
with  corporation. 


§  99.  Rescission  by  corporation  of 
transactions  with  third  per- 
sons on  ground  of  partici- 
pation by  such  persons  in 
frauds  of  promoters. 

100.  Election  by  corporation  to  con- 

firm or  rescind  contract. 

101.  Right  to  rescind  barred   by 

laches. 

102.  Return  of   consideration   re- 

ceived ordinarily  condition 
precedent  to  right  to  re- 
scind. Exceptions. 

103.  Partial  rescission  not  allowed. 

104.  Burden  of  proof  in  suit  for 

rescission. 


§  93.  Rescission  an  elective  remedy.  —  When  a  sale  of 
property  to  or  a  contract  with  a  corporation  has  been 
made  by  or  through  its  promoters,  and  in  the  making  of 
such  sale  or  contract  the  promoters  have  obtained  secret 
bribes  or  profits,  or  have  abused  their  power  or  influence, 
the  corporation  may,  under  certain  circumstances,  as  we 
have  seen,  without  repudiating  the  sale  or  contract,  recover 
from  the  promoters  the  money  received  by  them  as  bribes 
or  profits,  or  hold  them  responsible  in  damages.  But  the 
corporation  is  not  confined  to  these  remedies.  In  a  proper 
case,  it  may,  in  place  of  pursuing  such  remedies,  if  it  so 
elects,  and  if  it  acts  seasonably,  procure  the  transaction  to 
be  set  aside  altogether,  and  get  back  that  with  which  it  has 
parted. 

§  94.  Rescission  of  contracts  on  ground  of  breach  of  duty  of 
promoters.  —  When  the  corporation  is  formed  for  the  pur- 
pose of  purchasing  property  from  or  entering  into  a  con- 
tract with  the  promoters,  the  interests  of  the  promoters 
and  of  the  corporation  necessarily  conflict.  Nevertheless, 


BREACH  OF  DUTY  OR  FRAUD  BY  PROMOTERS.     103 

in  such  case,  the  promoters  are  not  absolutely  disquali- 
fied from  dealing  with  the  corporation  ;  but  being  in  a 
position  of  trust  and  confidence  in  relation  to  it,  they  must 
show,  when  their  dealings  are  called  in  question,  that  they 
have  not  used  their  position  for  their  own  benefit  only,  but 
have  acted  with  that  degree  of  fairness  and  with  that  re- 
gard for  the  protection  of  the  interests  of  the  corporation 
which  a  Court  of  Equity  exacts  from  persons  in  the  rela- 
tion which  they  occupy.  They  must  fully  disclose  their 
position  and  interest  and  all  material  facts  within  their 
knowledge ;  and,  as  a  rule,  they  must  see  that  the  directors 
who  are  to  pass  upon  the  transaction  in  question  are  com- 
petent and  disinterested  persons,  who  can  and  do  exercise 
an  intelligent  and  impartial  judgment  in  the  matter.1  If 
they  fail  in  these  duties,  the  corporation  is  entitled  to  have 
transactions  with  them  rescinded. 

§  95.  Erlanger  v.  New  Sombrero  Phosphate  Co.2  —  is  the 
leading  case  on  this  point.  A  sale  of  property  to  the 
company  named  in  this  case  was  rescinded  on  the  follow- 
ing facts.  A  syndicate,  of  which  Baron  Erlanger,  a  Paris 
banker,  was  at  the  head,  purchased  for  £55,000,  from  the 
official  liquidator  of  an  insolvent  company,  an  island  said 
to  contain  valuable  mines  of  phosphate.  Erlanger,  who 
managed  the  business  of  this  purchase,  then  proceeded  to 
get  up  a  company  to  take  over  the  island  and  to  work  the 
mines.  He  named  five  persons  as  directors.  Two  were 
abroad ;  of  the  three  others,  two  were  persons  entirely 
under  his  control,  and  were  furnished  by  him  with  the 
shares  necessary  to  qualify  them  as  directors.  One  .  of 
these  two  persons  had  acted  as  a  business  agent  for 
Erlanger,  and  the  other  was  a  personal  friend.  The  sale 
of  the  island  was  made,  nominally,  by  a  person  who  had 
really  no  interest  in  the  island,  and  was  made  to  the 

1  See  Sect.  26,  et  seq.  2  3  App.  Cas.  1218. 


104        PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

director  who  was  the  business  agent  of  Erlanger,  and  who 
appeared  as  the  purchaser  for  the  company.  The  price 
•was  £80,000  in  cash  and  £30,000  in  paid-up  shares  of 
the  company.  The  two  directors,  with  whom,  through 
Erlanger's  arrangement,  a  third  person  (one  entirely  un- 
informed on  the  subject  of  the  original  purchase  and  the 
subsequent  sale)  was  associated,  assuming  to  act  as  direc- 
tors of  the  company,  accepted,  on  its  behalf,  the  purchase. 
The  price  paid  by  the  syndicate  for  the  island  was  not 
disclosed.  Subsequently,  these  facts  coming  to  light,  the 
company  filed  a  bill  to  rescind  the  purchase ;  and  a  decree 
for  rescission  was  made  on  the  ground  that  the  promoters 
had  made  an  unfair  and  unreasonable  use  of  the  position 
of  advantage  in  which  they  stood  in  relation  to  the  com- 
pany, and  had  withheld  from  the  company  the  needful 
protection  to  which  it  was  entitled  at  their  hands  in  the 
transaction  in  question.  "  I  cannot,"  said  Lord  Cairns, 
"  but  regard  a  meeting  at  which  two  of  the  principal  direc- 
tors did  not  and  could  not  attend,  at  which  one  who  did 
attend  and  take  part  in  the  deliberations  was  at  once  a 
person  buying  and  selling,  where  the  legal  adviser  present 
and  assisting  was  virtually  another  vendor,  and  where  the 
two  remaining  directors  are  not  shown  to  have  had  the 
means  of  exercising,  or  to  have  exercised,  any  intelligent 
judgment  on  the  subject,  as  little  else  than  a  mockery  and 
a  delusion." 

§  96.  In  Atwool  v.  Merry  weather,1  —  the  facts  were  these  : 
Merryweather  was  the  owner  of  mining  property,  which  he 
proposed  to  sell  for  £4,000.  He  applied  to  Whitworth  to 
assist  him  in  his  project.  The  scheme  concocted  between 
them  was  that  a  company  should  be  formed  for  the  pur- 
pose of  purchasing  and  working  the  mines,  which  were  to 
be  sold  to  such  company  for  £7,000.  Of  this  money,- it 
1  5  Eq.  464,  n. 


BEEACH  OF  DUTY  OR  FRAUD  BY  PROMOTERS.     105 

was  agreed  that  Meriyweather  should  get  .£4,000,  while 
the  remaining  £ 3,000  was  to  be  paid  to  Whitworth  for  his 
assistance  in  getting  up  the  company.  This  agreement 
was  concealed.  The  company  was  formed  under  the 
promotion  of  Merryweather  and  Whitworth,  who  sent  out 
a  prospectus  stating  that  the  company  had  been  formed  to 
purchase  and  work  the  mines  in  question,  and  that  the 
purchase  price  had  been  fixed  at  £7,000,  of  which  £4,000 
was  to  be  paid  in  cash  and  £3,000  in  shares  of  the  com- 
pany. Whitworth  became  a  director.  The  company  hav- 
ing received  £3,940  for  subscriptions  for  shares,  paid  the 
same  to  Merryweather,  and  transferred  to  him  six  hundred 
shares  of  its  capital  stock  in  part  payment  of  the  alleged 
price  of  the  mines.  Upon  the  discovery  of  the  agreement 
between  Merryweather  and  Whitworth,  certain  stockholders 
of  the  company  brought  a  bill  to  rescind  the  contract  of 
sale  and  purchase.  A  decree  was  made,  setting  aside  the 
contract  of  sale  and  purchase,  and  directing  that  the  pur- 
chase money  should  be  repaid  with  interest  and  the  share 
certificates  given  to  Merryweather  delivered  up.  Vice- 
Chancellor  Wood  said :  "  Upon  such  a  transaction  the 
Court  will  hold  that  the  whole  contract  is  a  complete 
fraud.  I  do  not  in  the  least  say  that  where  persons  with 
their  eyes  open  know  that  the  agent  who  secures  them  the 
bargain  is  going  to  take  money  for  it,  that  would  not  be  all 
right  enough.  If  the  company  knew  this  gentleman  was 
to  have  this  amount  as  promotion  money,  well  and  good. 
.  .  .  But  here  it  is  a  simple  fraud,  and  nothing  else. 
Merryweather,  knowing  Whitworth's  position  with  regard 
to  the  company,  and  that  as  an  honest  man  Whitworth 
was  bound  to  tell  the  company  what  price  he  bought  the 
mines  for,  agreed  that  the  mines  should  be  sold  to  the  com- 
pany for  £7,000,  and  that  the  real  price,  £4,000,  should 
not  be  disclosed  to  the  company." 


106    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

§  97.  In  Phosphate  Sewage  Co.  v.  Hartmont,1  —  the 
owners  of  a  concession  from  a  foreign  government  entered 
into  a  scheme  to  organize  a  company  to  buy  the  concession, 
which,  as  they  knew,  was,  on  account  of  their  default,  sub- 
ject to  forfeiture.  They  and  others  who  were  promoters  of 
the  company,  and  knew  of  the  defect  in  the  title,  brought 
about  a  sale  to  trustees  for  the  projected  company.  The 
trustees  transferred  the  concession  to  the  company  when 
formed,  arid  secretly  received  to  their  own  use  a  portion  of 
the  purchase  money  as  a  reward  for  their  share  in  the 
transaction.  The  solicitors  of  the  company  were  also 
solicitors  for  the  vendors,  and  although  they  knew  of  the 
infirmity  in  the  title,  they  concealed  it,  and  the  trustees 
neglected  to  secure  proof  as  to  whether  the  title  was  good. 
It  was  held  that  the  company  was  entitled  to  a  rescission 
of  the  purchase,  and  to  a  recovery  of  the  money  paid  to  the 
trustees,  as  money  received  by  them  as  a  bribe  for  not  per- 
forming their  duty. 

§  98.  Caveat  emptor  not  applicable  to  dealings  by  promoters 
with  corporation.  —  Promoters  are  in  a  fiduciary  relation  to 
the  corporation  which  they  promote.  When  a  fiduciary 
relation  exists  between  parties,  and  there  is  any  misrepre- 
sentation or  concealment  of  a  material  fact,  or  any  just 
suspicion  of  artifice,  in  a  transaction  between  them  or  in 
dealings  by  one  in  behalf  of  the  other,  Courts  of  Equity 
will  interpose,  if  the  rights  of  innocent  third  parties  have 
not  intervened,  and  set  the  transaction  aside.  The  maxim 
caveat  emptor  does  not  apply  here,  and  the  rules  pertaining 
to  representations  as  to  value,  cost,  opinion,  etc.,  in  cases 
where  the  parties  deal  at  arm's-length,  are  not  applicable.2 

§  99.  Rescission  of  transactions  with  third  persons  on  ground 
of  participation  by  such  persons  in  frauds  of  promoters. — 

1  5  Ch.  D.  394. 

2  Cheney  v.  Gleason,  125  Mass.  166  ;  Cortes  v.  Thanhauser,  45  Fed. 
Rep.  731. 


BREACH  OF  DUTY  OR  FRAUD  BY  PROMOTERS.     107 

When  a  sale  of  property  by  a  non-promoter  owner  to  a 
corporation  has  been  brought  about  by  or  through  the  in- 
tervention of  its  promoters,  and  the  promoters  have,  with 
the  participation  or  connivance  of  the  owner,  obtained 
secret  profits  or  bribes,  or  abused  their  power  or  influence 
in  the  transaction,  the  corporation  is  entitled  to  have  the 
sale  rescinded.  Thus,  in  Lindsay  Petroleum  Company  v. 
HurdJ-  A.  having  two  parcels  and  B.  one  parcel  of  land 
supposed  to  contain  petroleum,  it  was  agreed  between  them 
and  C.  that  C.  should  pay  them  $10,000  for  the  land,  if  he 
succeeded  in  forming  a  company  for  the  purpose  of  work- 
ing the  oil  springs,  and  in  inducing  such  company  to  pay 
him  $13,750,  as  the  price  of  the  land,  out  of  which  he  was 
to  keep  $8,750.  B.,  accordingly,  assuming  the  character  of 
owner,  gave  to  C.  a  conditional  promise  to  sell  the  land  to 
him  for  $13,750,  provided  the  offer  was  accepted  within  a 
certain  time.  A.  wrote  a  letter,  meant  to  be  shown,  and 
which  was  shown,  to  persons  intending  to  become  members 
of  the  proposed  company,  in  which  letter  he  recommended 
the  purchase,  not  disclosing  that  he  had  any  interest  therein. 
A.  and  B.  actively  co-operated  with  C.  throughout  the  whole 
transaction.  The  company,  in  ignorance  of  the  agreement 
with  C.,  accepted  the  proposal,  but,  having  discovered  the 
fraud,  sued  for  a  rescission  of  the  contract.  It  was  held 
that  the  contract  must  be  wholly  rescinded,  the  price  re- 
paid, and  the  land  reconveyed.  "  It  is  difficult,"  said  Sir 
Barnes  Peacock,  "  to  conceive  anything  more  clearly 
fraudulent  than  for  the  owners  of  property  to  arm  a  person 
whom  they  know  to  be  about  to  endeavor  to  find  others  to 
take  up  a  purchase,  whether  as  a  company  or  otherwise, 
with  a  document  purporting  to  be  an  offer  made  by  them- 
selves, as  owners,  to  sell  at  a  fictitious  price,  at  which  price 
he  is  to  propose  to  other  people  to  take  up  and  to  accept 

1  L.  R.  5  P.  C.  221. 


108    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

that  offer  as  if  it  were  the  real  one.  If  that  be  not  the 
real  price  which  the  owners  of  the  property  expect  to  get, 
and  if  they  are  parties  to  an  arrangement  that  the  inter- 
mediate agent,  who  is  to  induce  others  to  accept  the  offer, 
is  himself  to  put  a  considerable  part  of  the  nominal  price 
into  his  own  pocket,  without  any  communication  of  the 
facts,  the  document  is  a  dishonest  and  false  document  upon 
the  face  of  it,  representing  no  real  transaction,  but  evi- 
dently representing  a  false  transaction,  only  in  order  to 
deceive  somebody.  It  was  used  to  deceive,  and  so  used 
with  the  knowledge  "  of  the  parties.1 

S  100.  Election  by  corporation  to  confirm  or  rescind  con- 
tract.—  A  corporation  wronged  by  its  promoters  in  a 
transaction,  in  the  manner  stated,  may  elect  whether  to 
affirm  the  transaction  or  to  rescind  it.  The  election  once 
made,  if  made  with  full  knowledge  of  the  facts,  is  irre- 
vocable.2 It  may  be  express,  or  implied  from  unequivocal 
acts  showing  a  determination,  after  discovering  the  facts,  to 
retain  the  property  or  rights  which  have  passed  to  it  in  the 
transaction.3  An  action  against  the  promoters  to  recover 
damages  or  secret  profits,  for  example,  would  amount  to  an 
affirmance  of  the  transaction,  and  a  waiver  of  the  right  to 

1  The  consequences  of  surreptitious  dealing  with  promoters  by  a 
third  person  who  is  endeavoring  to   caTry  out   a  transaction   with 
the  corporation,  through  its  promoters,  must  in  the  ordinary  case  be 
the  same  as  the  consequences  of  such  dealings  with  an  agent.     The 
principles  applicable  in  a  case  of  agency  are  illustrated  in  Panama  §• 
South  Pacific  Telegraph  Co.  v.  India  Rubber,  Gulta  Percha  §•  Telegraph 
Works  Co.,  10  Ch.  515.     See  also  Smith  v.  Sorby,  3  Q.  B.  D.  552; 
Henninger  v.  Heald,  52  N.  J.  Eq.  431  ;  Briggs  v.  Withey,  24  Mich. 
136. 

2  1  Bigelow  on  Fraud,  436  ;  Kennedy  v.  Thorp,  51  N.  Y.  174  ;  Great 
Luxembourg  Ry.  Co.  v.  Magnay,  25  Beav.  586.     As  to  the  right  of  a 
majority  of  the  stockholders  to  bind  the  minority  by  such  election, 
see  infra. 

*  See  Chief  Justice  Shaw's  definition  of  waiver,  in  Farlow  v.  Ellis, 
15  Gray,  229 ;  Tarkinson  v.  Purvis,  128  Ind.  182. 


BREACH  OF  DUTY  OR  FRAUD  BY  PROMOTERS.     109 

rescind.1  Continuing  to  deal  with  the  property,  as,  for 
instance,  when  the  property  is  a  mine,  continuing  to  work 
it,  after  knowledge  of  the  facts,  may  constitute  affirmance.2 
Lapse  of  time,  after  the  facts  are  known,  may  be  such  as  to 
furnish  evidence  that  the  corporation  has  determined  upon 
affirmance  ;  and  it  may  be  so  great  that  it  would  perhaps 
be  treated  in  practice  as  conclusive  evidence  of  such  deter- 
mination.3 In  Vigers  v.  Pike,4  Lord  Cottenham  said  :  "  A 
man  who,  with  full  knowledge  of  his  case,  does  not  com- 
plain, but  deals  with  his  opponent  as  if  he  had  no  case 
against  him,  builds  up  from  day  to  day  a  wall  of  protection 
for  such  opponent,  which  will  probably  defeat  any  future 
attack  upon  him." 

§  101.  Right  to  rescind  barred  by  laches.  —  Although  the 
corporation  has  not  affirmed  the  transaction,  still,  in  order 
to  obtain  rescission,  on  any  of  the  grounds  stated,  it  must  be 
free  from  laches  ;  in  other  words,  it  must  bring  its  suit  for 
relief  seasonably.  The  right  to  rescind  remains  only  for  a 
reasonable  time  after  the  discovery  of  the  facts,6  and  "  the 
law  is  well  settled  that  when  the  question  of  laches  is  at 
issue,  the  plaintiff  is  chargeable  with  such  knowledge  as  he 
might  have  attained  upon  inquiry,  provided  the  facts  already 
shown  by  him  were  such  as  to  put  a  man  of  ordinary  intel- 
ligence on  inquiry."6  From  the  nature  of  the  subject,  it  is 

1  Sanger  v.  Wood,  3  Johns  Ch.  (N.  Y.)  416. 

2  Vigers  v.  Pike,  8  Cl.  &  F.  562;  Morgan  v.  Thetford,  3  111.  App.  323  ; 
Barr  v.  New  York,  Lake  Erie  Sf   Western  R.  R.  Co.,  125  N.  Y.  263. 
Compare  the  judgments  of  Lord  Cairns  and  Lord  Blackburn  in  Er- 
langer  v.  New  Sombrero  Phosphate  Co.,  3  App.  Cas.  1218. 

8  Clough  v.  London  Sf  Northwestern  Ry.  Co.,  1  Ex.  at  p.  35;  Schif- 
fer  v.  Dietz,  83  N.  Y.  300 ;  Williamson  v.  New  Jersey  Southern  R.  R. 
Co.,  29  N.  J.  Eq.  311 ;  Davis  v.  Stuard,  99  Penn.  295. 

*  8  Cl.  &  F.  562. 

6  Royal  Bank  of  Liverpool  v.  Grand  Junction  Railroad,  125  Mass. 
490  ;  In  re  Pinto  Silver  Mining  Co.,  8  Ch.  D.  273. 

6  Foster  v.  Mansfield  R.  R.  Co.,  146  U.  S.  88. 


110    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

not  practicable  to  state  a  precise  rule  as  to  what  is  or  is  not 
unreasonable  delay.  This  must  be  decided  according  to  the 
circumstances  of  each  case,  with  a  view  to  doing  practical 
justice  between  the  parties.  But  it  may  be  laid  down 
that  no  delay  for  the  purpose  of  enabling  a  party  to  spec- 
ulate upon  the  chances  which  the  future  may  give  him 
of  deciding  profitably  to  himself  whether  he  will  abide  by 
his  bargain  or  rescind  it,  is  allowed  in  a  Court  of  Equity.1 
This  is  especially  applicable  where  the  subject-matter  of 
the  controversy  is  property  of  a  speculative  character  or 
of  fluctuating  value.  In  Twin  Lick  Oil  Company  v.  Mar- 
bury,2  relief  was  refused,  the  suit  having  been  brought  four 
years  after  the  sale  of  the  property  in  question,  which  con- 
sisted of  oil  lands  subject  to  marked  fluctuations  in  value.3 
The  death  of  parties  or  witnesses,  or  the  loss  of  evidence 
that  might  have  been  obtained,  if  suit  had  been  seasonably 
brought,  is  of  great  moment  in  the  question  of  laches.4  Of 
course,  if,  prior  to  the  suit  for  rescission,  an  innocent  third 
party  has  acquired  an  interest  which  would  be  affected  by 
the  decree,  rescission  cannot  be  had.6 

§  102.  Return  of  consideration  received,  ordinarily  condition 
precedent  to  right  to  rescind.  —  Exceptions.  —  Restoration  of 
the  thing  received  by  the  injured  party  is,  as  a  rule,  a  con- 
dition precedent  to  rescission.  In  some  cases  the  return 
may  be  of  an  equivalent  in  place  of  the  identical  thing  re- 

1  Miller,  J.,  in  Twin  Lick  Oil  Co.  v.  Marbury,  91  U.  S.  592.     Com- 
pare the  opinions  in  Erlanger  v.  New  Sombrero  Phosphate  Co.,  3  App. 
Cas.  1218. 

2  91  U.  S.  587. 

8  See  also  Neblett  v.  Macfarland,  92  U.  S.  101,  104  ;  Gartner  v. 
Walrod,  83  111.  171 ;  Cox  v.  Montgomery,  36  111.  396 ;  Jones  T.  Smith, 
33  Miss.  215;  Lindsay  Petroleum  Co.  v.  Hurd,  L.  R.  5  P.  C.  221. 

4  Jenkins  v.  Pye,  12  Peters,  241 ;  Canpau  v.  Van  Dyke,  15  Mich. 
371 ;  Hatcher  v.  Hall,  77  Va.  573. 

5  Stevenson  v.  Newnham,  13  C.  B.  285  ;  Pease  v.  Gloaheck,  L.  R. 
1  P.  C.  219. 


BREACH  OF  DUTY  OR  FRAUD  BY  PROMOTERS.     Ill 

ceived.  Thus,  on  rescission  of  a  sale  of  merchandise,  either 
the  original  articles,  or  their  number,  quantity,  and  value, 
in  kind,  should  be  restored.1  If  the  property  is  entirely 
worthless,  it  need  not  be  restored.2  In  Phosphate  Sewage 
Company  v.  Hartmont?  the  promoters  of  a  company  sold  to 
it  a  concession  from  a  foreign  government  which  was  sub- 
ject to  forfeiture.  On  a  bill  to  rescind  the  sale  on  account 
of  fraud  on  the  part  of  the  promoters,  the  objection  that  the 
company  had  not  re-conveyed,  or  tendered  a  re-conveyance 
of  the  concession,  was  overruled  on  the  ground  that  the 
concession  was  worthless,  the  forfeiture  to  which  it  was 
subject  having  taken  place.  But  the  rule  requires  that  the 
other  party  shall  be  substantially  restored  to  his  status  quo  ; 
therefore  if  the  property  has  the  slightest  value,  or  its  loss 
may  be  a  disadvantage  in  any  way,  even  if  it  have  no  intrinsic 
or  market  value,  it  must  be  returned.4  The  question  as  to 
the  worthlessness  of  the  property  may  be  a  question  of  law, 
as  in  the  case  of  forged  bank-notes  or  other  counterfeit  se- 
curities, or  of  a  title  judicially  determined  to  be  invalid. 
Ordinarily,  however,  it  is  a  question  of  fact,  as  in  a  case 
of  shares  of  stock  in  a  company  alleged  to  be  insolvent.5 
The  mere  fact  that  the  property  has  fallen  in  value  since 
the  transaction  in  question  will  not  prevent  rescission.6 

§103.  Partial  rescission  not  allowed.  —  The  rescission 
must  be  in  toto  ;  a  transaction  cannot  be  rescinded  in  part 

1  Smith  v.  Brittenham,  109  111.  540;  Bodley  v.  Me  Chord,  4  J.  J. 
Marsh.  (Ky.)  475. 

8  Perley  v.  Balch,  23  Pick.  283  ;  Snow  v.  Alley,  144  Mass.  551  ; 
Babcock  v.  Case,  61  Penn.  427  ;  Haase  v.  Mitchell,  58  Ind.  213. 

«  5  Ch.  D.  394. 

4  Snow  v.  Alley,  144  Mass.  551  ;  Gay  v.  Alter,  102  U.  S.  79  ; 
Gushing  v.  Wyman,  38  Me.  589;  Manahan  v.  Noyes,  52  N.  H.  232; 
Moriarty  v.  Stofferan,  89  111.  523  ;  Hunt  v.  Silk,  5  East,  449 ;  Clarke 
v.  Dicteon,  1  E.  B.  &  E.  148. 

6  Beetenn  v.  Burkholder,  69  Penn.  249. 

6  Neblett  v.  Macfarland,  92  U.  S.  101. 


112         PROMOTERS  AND   PROMOTION  OF  CORPORATIONS. 

and  stand  good  for  the  residue.1  To  permit  the  value  of 
property  to  be  handed  over  in  money,  in  place  of  the  prop- 
erty itself,  would  in  most  cases  amount  to  a  partial  rescis- 
sion. In  Higgins  v.  Lansmgli?  it  was  found  that  Higgins, 
one  of  the  managers  of  a  company,  had  improperly  sold  land 
to  it  for  a  price  largely  in  excess  of  the  market  value.  The 
trial  court  decreed  that  the  excess  over  the  market  value 
should  be  refunded  to  the  company,  the  company  retaining 
the  land.  This  was  reversed  on  appeal.  "  It  is  not  ques- 
tioned," said  the  Appellate  Court,  "  that  if  the  price  charged 
to  the  company  by  Higgins  were  exorbitant,  or  so  much  in 
excess  of  the  market  value  as  to  make  the  transaction  unfair 
or  oppressive  to  the  company,  a  Court  of  Equity  would, 
upon  application  made  in  apt  time,  set'  it  aside,  he  being  at 
the  time  of  the  sale  one  of  the  managers  of  the  company ; 
but  it  cannot  be  said  that  because  he  paid  only  $24,000  for 
the  land,  he  was  under  any  obligations  to  sell  it  to  the  com- 
pany for  anything  like  that  amount.  He  was  not  a  manager 
or  other  officer  of  the  company  when  he  bought  it.  ...  He 
had  the  right  to  purchase  the  land,  and  to  keep  it  or  sell  it 
to  the  company,  as  he  saw  fit.  But  if  it  be  conceded  that 
the  price  was  so  excessive  as  to  make  the  sale  unfair  and 
oppressive,  can  appellees  or  the  company  now  have  the  sale 
rescinded  without  restoring  the  land  to  Higgins  ?  We 
think  not.  ...  It  might  well  be  that  Higgins  would  not 
have  sold  to  the  company  for  what  the  land  would  have 
brought  in  1873  in  the  market.  He  doubtless  bought  it  for 
a  speculation,  and  he  had  a  right  to  keep  it  until  he  could 
get  his  price  for  it,  and  we  know  of  no  power  in  a  Court  of 
Equity  to  compel  him  to  sell  the  land  for  its  market  value ; 
and  to  undertake  now  to  fix  that  value  as  the  measure  of 

1  Sheffield  Nickel  Co.  v.  Unwin,  2  Q.  B.  D.  214,  223 ;  Grant  v.  Lato, 
29  Wise.  99  ;  'Rand  v.  Webber,  64  Me.  191. 

2  154  111.  301,  378. 


BREACH  OF  DUTY  OR  FRAUD  BY  PROMOTERS.     113 

pay  for  this  land  would  seem  to  place  in  jeopardy  the  rights 
of  all  the  parties,  while  to  rescind  the  sale  in  toto  would 
probably  be  of  no  benefit  to  either.  .  .  .  We  are  of  the 
opinion  that  neither  the  complainant  nor  the  company  is 
entitled  to  rescission." 

§  104.  Burden  of  proof  in  suit  for  rescission.  —  The  rule  as 
to  the  burden  of  proof  was  thus  laid  down  by  Lord  Watson 
in  Bentinck  v.  Fenn : l  "  In  a  case  where  rescission  is  asked, 
and  it  is  not  denied  that  at  the  time  when  the  sale  was 
made  the  seller  failed  in  breach  of  his  duty  to  disclose  his 
interest,  the  onus  rests  upon  him  to  prove,  if  he  desires  to 
maintain  the  transaction,  that  his  interest  became  known 
to  the  purchaser  at  a  subsequent  period,  and  that  the  pur- 
chaser, either  expressly  or  by  plain  implication,  elected  to 
uphold  the  transaction.  But  the  case  is  very  different 
when  a  defendant  is  charged  with  making  undue  profits  in 
the  dark,  at  the  expense  of  the  purchaser,  or  with  fraudu- 
lent concealment  of  facts  which  has  led  to  loss  on  the  part 
of  the  purchaser.  The  onus  probandi  then  is  upon  the 
plaintiff,  —  the  usual  rule  of  law  must  apply.  I  know  of 
no  case  where  by  implication  of  law  the  duty  of  clearing 
himself  from  an  imputed  fraud  rests  on  the  defendant." 

1  12  App.  Cas.  at  p.  666. 


114   PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 


CHAPTER  VI. 

SUITS    BY  SHAREHOLDERS    TO   COMPEL    REDRESS    FOR  WRONGS 
BY  PROMOTERS   TO   THE   CORPORATION. 


§  105.  As  general  rule  suit  can  be 
brought  only  by  corpora- 
tion. 

106.  Exceptions  to  this  rule. 

107.  Proof  necessary  to  establish 

disability  of  corporation 
to  sue. 

108.  Transactions  on  account  of 

which  shareholders  may 
or  may  not  bring  suit. 

109.  Exposition  of  rule  on  this 

subject  by  Lords  Justices 
James  and  Mellish. 

110.  Right  of  minority  sharehold- 

ers to  sue  to  rescind  trans- 
action voidable  for  fraud, 
when  majority  are  the 
wrong-doers. 

111.  Atwool  v.  Merryweather,  5 

Eq.  464,  n. 

112.  Mason  v.  Harris,  11  Ch.  D. 

97. 

113.  Eight    of   minority,    where 

majority  are  not  the 
wrong-doers,  to  sue  to 
rescind  contracts  voidable 
for  fraud. 


§  114.    Foss  v.  Harbottle,  2  Hare, 
461. 

115.  Eight  of  minority  to  sue  to 

rescind  a  voidable  trans- 
action where  there  is  no 
fraud. 

116.  Eight  of  minority  to  sue  for 

recovery  of  secret  profits 
obtained  by  promoters. 

117.  Majority    not    allowed      to 

retain  profits  wrongfully 
obtained  at  expense  of 
minority. 

118.  Eight    of   minority    to  sue 

for  recovery  of  promoter's 
profits  on  sale  to  corpora- 
tion at  fraudulently  ex- 
cessive price. 

119.  Shareholder    whose    shares 

have  been  voted  on  in 
favor  of  a  transaction  can- 
not maintain  suit  based 
upon  it. 

120.  Eule  in  Federal  Courts. 

121.  Shareholders'  suit  may  be 

barred  by  laches. 

122.  Form  of  shareholders'  suit. — 

Necessary  parties. 


§  105.  General  rule  that  suit  can  be  brought  only  by  the 
corporation.  —  As  a  general  rule,  suits  to  obtain  redress 
for  wrongs  to  the  corporation,  or  to  enforce  corporate 
rights,  must  be  brought  by  the  corporation  itself  through 
its  regularly  appointed  agents,  and  it  is  not  competent  for 
the  shareholders  to  sue  for  such  purpose  in  their  own 
names  or  in  the  corporate  name.  The  management  of  the 


SUITS   BY   SHAREHOLDER.  115 

affairs  of  a  corporation  is  by  law  and  by  the  agreement  of 
the  shareholders  vested  in  its  duly  constituted  agents,  ordi- 
narily in  a  board  of  directors,  with  whom  accordingly  must 
rest  the  decision  of  the  question  of  the  expediency  of  bring- 
ing corporate  suits.1  "It  would  be  a  doctrine  attended 
with  very  serious  consequences,"  said  Mr.  Justice  Miller, 
"  if  every  individual  shareholder,  assuming  the  place  of  the 
corporation,  could  decide  for  it  when  actions  should  be 
brought  to  vindicate  its  supposed  right.  Each  one  of  the 
shareholders  might  elect  to  claim  a  remedy,  and  resort  to 
a  tribunal  different  from  those  chosen  by  every  other,  and 
use  the  Court  of  Equity  to  enforce  his  views,  regardless  of 
the  duly  constituted  officers  and  all  other  parties  having 
interests,  rights,  and  powers  equal  to  his  own.  In  such  a 
struggle  the  real  interests  of  the  corporation  might  be 
entirely  sacrificed."  2 

§  106.  Exceptions  to  the  rule.  —  This  general  rule  has, 
however,  its  exceptions.  When  it  is  duly  shown  that  the 
corporation  is  disabled  from  asserting  its  rights  in  the 
courts,  shareholders  are  permitted  to  bring  suit,  provided 
the  suit  is  of  such  a  nature  that  it  clearly  ought  to  be 
brought  in  order  to  conserve  the  equitable  rights  of  share- 
holders, and  to  prevent  a  failure  of  justice. 

§  107.  Proof  necessary  to  establish  disability  of  corpora- 
tion to  sue.  —  In  order  to  establish  the  disability  of  the  cor- 
poration, the  following  facts  must  be  alleged  and  proved : 

First.  That  a  demand  has  been  made  upon  the  directors 
to  bring  suit  and  that  they  have  refused  so  to  do ;  or,  that 
the  directors  are  the  wrong-doers  in  the  transaction  com- 

1  Smith  v.  Hurd,  12  Met.  371;  Abbott  v.  Merriam,  8  Gush.  588; 
Lord  v.  Copper  Miners  Company,  2  Phill.  740  ;  Foss  v.  Harbottle,  2  Hare, 
461;  Allen  v.  Curtis,  26  Conn.  456;  Jones  v.  Johnson,  10  Bush  (Ky.), 
649;  Robinson  v.  Smith,  3  Paige,  222. 

3  Samuel  v.  Holladay,  1  Woolw.  (U.  S.  C.  Ct.)  400. 


116        PROMOTERS   AND   PROMOTION  OF  CORPORATIONS. 

plained  of,  or  are  in  collusion  with  the  wrong-doers,  in 
which  case  a  demand  is  unnecessary,  not  only  because 
ordinarily  it  would  be  a  futile  formality,  but  because,  under 
such  circumstances,  it  would  be  a  perversion  of  justice  to 
allow  the  directors  to  conduct  the  litigation.  A  demand 
and  refusal,  or  the  facts  relied  on  to  excuse  a  demand,  must 
be  alleged  and  proved.1 

Second.  That  due  effort  has  been  made,  unsuccessfully, 
to  bring  about  the  choice  of  new  directors  competent  and 
willing  to  institute  and  carry  on  the  desired  suit.  "  Annual 
meetings,"  said  Mr.  Justice  Wells  in  Brewer  v.  Boston 
Theatre  Co.?  "  even  if  special  meetings  are  impracticable, 
secure  to  the  corporation  ample  means  of  correcting  abuses 
practised  by  their  officers,  so  far  as  correction  is  desired 
by  the  majority  or  by  the  corporation  as  a  body.  It  is  not 
to  be  presumed  that  the  body  of  the  corporation  will  toler- 
ate a  wrong  in  their  elective  officers,  by  which  they  are 
themselves  defrauded."  It  should  also  be  noted  that  a 
corporation  has  an  implied  power  incident  to  its  existence 
as  a  corporation,  and  independent  of  statutory  or  charter 
provisions,  to  remove  a  director  for  just  cause.  The  power 
of  removal  is  incident  to  the  power  of  appointment,  and  it 
may  therefore  be  exercised  by  a  majority  of  the  share- 
holders.3 But  if  the  delay  incident  to  the  effort  to  procure 

1  Robinson  v.  Smith,  3  Paige,  222;  Peabody  v.  Flint,  6  Allen,  52; 
Dunphy  v.  Traveller  Newspaper  Association,  146  Mass.  495;  Hersey  v. 
Veazie,  24  Me.  9;  March  v.  Eastern  R.  R.  Co.,  40  N.  H.  548;  Heath 
v.  Erie  Ry.  Co.,  8  Blatch.  347;  Wheeler  v.  Pullman  Iron  if  Steel  Co., 
143  111.  197;  Farwell  v.  Great  Western  Telegraph  Co.,  161  111.  5225 
Bjorngaard  v.  Goodhue  County  Bank,  49  Minn.  483;  Koop  v.  Bohm- 
ricTi,  49  N.  J.  Eq.  82 ;  Boyd  v.  Sims,  87  Tenn.  771 ;  Miller  v. 
Murray,  17  Col.  408 ;  Allen  v.  Curtis,  26  Conn.  456  ;  Alexander  v. 
Searcy,  81  Ga.  536.  See  also  cases  cited  in  note  1,  page  117. 

3  104  Mass,  at  p.  393. 

8  Neallv.  Hill,  16  Cal.  145;  Ohio  v.  Bryce,  7  Ohio,  82;  Bayless  v. 
Orne,  Freem.  Ch.  (Miss.)  161;  Adamantine  Brick  Co.  v.  Woodruff", 
4  Me  Arthur  (D.  C.),  318;  Auburn  Academy  v.  Strong,  Hopk.  (N.  Y.) 


SUITS   BY   SHAREHOLDEKS.  117 

the  election  of  new  directors  would  be  prejudicial  to  the 
remedy  sought,  or,  if  the  majority  of  the  shareholders  are 
themselves  concerned  in  the  wrong-doing  complained  of, 
or  in  collusion  with  the  wrong-doers,  or  it  may  be  inferred 
with  reasonable  certainty  on  the  facts  shown  that  they 
would  disregard  the  wishes  of  the  minority  in  the  matter, 
then  an  effort  of  the  nature  stated  is  not  requisite.  The 
facts  relied  on  to  excuse  such  effort  must  be  alleged  and 
proved.1 

278;  Burr  v.  McDonald,  3  Gratt.  (Va.)  215;  Fawcettv.  Charles,  13 
Weud.  473;  People  v.  Higgins,  15  111.  110;.  State  v.  Trustees  of  Vin- 
cennes  University,  5  Ind.  77 ;  Lord  Burns1  Case,  2  Strange,  820. 

1  Brewer  v.  Boston  Theatre  Co.,  104  Mass.  378 ;  Landis  v.  Sea  Isle 
City  Hotel  Co.  (N.  J.),  31  At.  Rep.  755;  Dunphy  v.  Traveller  News- 
paper Association,  146  Mass.  495;  Wallace  v.  Lincoln  Savings  Bank, 
89  Term.  630;  Eschweiler  v.  Stowell,  78  Wise.  316;  Rathbone  v.  Parkers- 
burg  Gas  Co.  (Va.)  8  S.  E.  Rep.  570 ;  Haioes  v.  Oakland,  104  U.  S. 
450;  Tuscaloosa  Mfg.  Co.  v.  Cox,  68  Ala.  71;  Mozley  v.  Alston,  1 
Phill.  790;  Russell  v.  Wakefield  Waterworks  Co.,  20  Eq.  474;  Gray 
v.  Lewis,  8  Ch.  1035;  Mason  v.  Harris,  11  Ch.  D.  97;  Menier  v. 
Hooper's  Telegraph  Works,  9  Ch.  350 ;  Moore  v.  Silver  Valley  Mining 
Co.,  104  N.  C.  534;  Miller  v.  Murray,  17  Col.  408;  Hersey  v.  Veazie, 
24  Me.  9 ;  Merchants'  §•  Planters'  Line  v.  Wagoner,  71  Ala.  581. 

In  Hawes  v.  Oakland,  104  U.  S.  450,  Mr.  Justice  Miller  said: 
"  Before  the  shareholder  is  permitted  in  his  own  name  to  institute 
and  conduct  a  litigation  which  usually  belongs  to  the  corporation,  he 
should  show  to  the  satisfaction  of  the  Court  that  he  has  exhausted 
all  the  means  within  his  reach  to  obtain,  within  the  corporation  itself, 
the  redress  of  his  grievance,  or  action  in  conformity  to  his  wishes. 
He  must  make  an  earnest,  not  a  simulated  effort  with  the  managing 
body  of  the  corporation  to  induce  remedial  action  on  their  part,  and 
this  must  be  made  apparent  to  the  Court.  If  time  permits,  or  has  per- 
mitted, he  must  show,  if  he  fails  with  the  directors,  that  he  has  made 
an  honest  effort  to  obtain  action  by  the  stockholders  as  a  body,  in  the 
matter  of  which  he  complains.  And  he  must  show  a  case,  if  this  is  not 
done,  where  it  could  not  be  done,  or  it  was  not  reasonable  to  require 
it.  The  effort  to  induce  such  action  as  complainant  desires  on  the  part 
of  the  directors,  and  of  the  shareholders  when  that  is  necessary,  and 
the  cause  of  failure  in  these  efforts,  should  be  stated  with  particular- 
ity." These  requirements  were  subsequently  embodied  in  the  rule 


118         PROMOTERS  AND  PROMOTION   OF  CORPORATIONS. 

§  108.  Transactions  on  account  of  which  shareholders  may 
or  may  not  bring  suit.  —  The  disability  of  the  corporation 
to  sue  having  been  proved,  it  is  essential,  in  order  to  estab- 
lish the  right  of  minority  shareholders  to  begin  proceed- 
ings, to  show  that  the  transaction  on  account  of  which  it  is 
desired  to  bring  suit,  is  of  such  a  nature,  and  that  the  cir- 
cumstances are  such,  that  it  is  not  competent  for  the 
majority  of  the  shareholders  as  against  the  minority  to 
determine  that  no  action  shall  be  taken  in  the  matter  by 
the  corporation.  "  It  would  be  contrary  to  the  fundamental 
principles  of  corporate  organization,"  said  Mr.  Justice 
Knowlton  in  Dunphy  v.  Traveller  Newspaper  Association, 1 
"  to  hold  that  a  single  shareholder  can  at  any  time  launch 
the  corporation  into  litigation  to  obtain  from  another  what 
he  deems  to  be  due  to  it,  or  to  prevent  methods  of  manage- 
ment which  he  thinks  unwise.  Intelligent  and  honest  men 
differ  upon  questions  of  business  policy.  It  is  not  always 
best  to  insist  upon  all  one's  rights  ;  and  a  corporation  act- 
ing by  its  directors,  or  by  vote  of  its  members,  may  properly 
refuse  to  bring  a  suit  which  one  of  its  stockholders  believes 
should  be  prosecuted.  In  such  a  case  the  will  of  the 
majority  must  control.  It  is  only  when  the  action  of  a 
corporation  in  refusing  to  proceed  at  the  request  of  a  stock- 

of  practice  in  the  United  States  Courts  known  as  the  Ninety-fourth 
Equity  Rule,  which  provides,  among  other  things,  that  every  bill 
brought  by  one  or  more  stockholders  in  a  corporation,  and  other  par- 
ties, founded  on  rights  which  may  properly  be  asserted  by  the  cor- 
poration, must  "  set  forth  with  particularity  the  efforts  of  the  plaintiff 
to  secure  such  action  as  he  desires  on  the  part  of  the  managing 
directors  or  trustees,  and,  if  necessary,  of  the  shareholders,  and  the 
causes  of  his  failure  to  obtain  such  action."  When,  however,  the 
directors  are  the  wrong-doers,  or  in  collusion  with  the  wrong-doers, 
no  demand  on  them  to  bring  suit  is  required.  Young  v.  Alhambra 
Mining  Co.,  71  Fed.  Rep.  810;  Excelsior  Pebble  Phosphate  Co.  v. 
Brown,  74  Fed.  Rep.  323. 
1  146  Mass,  at  p.  497. 


SUITS   BY   SHAREHOLDERS.  119 

holder  is  fraudulent  as  against  him,  or  in  disregard  of  his 
rights,  that  he  can  maintain  a  suit  in  his  own  name  in  the 
corporate  right.  The  Court  cannot  interfere  in  the  manage- 
ment of  corporations,  in  matters  which  are  properly  within 
their  discretion,  so  long  as  their  discretion  is  fairly  exer- 
cised, and  it  is  always  assumed,  until  the  contrary  appears, 
that  they  and  their  officers  obey  the  law,  and  act  in  good 
faith  towards  all  their  members." 

§  109.  Exposition  of  rule  by  Lords  Justices  James  and 
Meliish.  —  Perhaps  the  most  useful  exposition  of  the  rule 
on  the  point  stated  in  the  preceding  section,  to  be  found  in 
the-  books,  is  that  contained  in  the  judgments  of  Lords 
Justices  James  and  Meliish,  in  MacDougall  v.  Gardiner.1 
"  I'  think,"  said  Lord  Justice  James,  "  it  is  of  the  utmost 
importance  in  all  these  companies,  that  the  rule,  which  is 
well  known  in  this  Court  as  the  rule  in  Mozley  v.  Alston? 
and  Lord  v.  Copper  Miners  Company?  and  Foss  v.  Harbot- 
tlef  should  always  be  adhered  to ;  that  is  to  say,  that 
nothing  connected  with  internal  disputes  between  the 
shareholders  is  to  be  made  the  subject  of  a  bill  by  some 
shareholder  in  behalf  of  himself  and  others,  unless  there 
be  something  illegal,  oppressive,  or  fraudulent  —  unless 
there  is  something  ultra  vires  on  the  part  of  the  company, 
qua  company,  or  on  the  part  of  the  majority  of  the  com- 
pany, so  that  they  are  not  fit  persons  to  determine  it ;  but 
that  every  litigation  must  be  in  the  name  of  the  company, 
if  the  company  really  desire  it.  Because  there  may  be  a 
great  many  wrongs  committed  in  a  company  —  there  may 
be  claims  against  directors,  there  may  be  claims  against 
officers,  there  may  be  claims  against  debtors,  there  may 
be  a  variety  of  things,  which  a  company  may  be  well  en- 
titled to  complain  of,  but  which,  as  a  matter  of  good  sense, 

1  1  Ch.  D.  13.  «  2  Phill.  740. 

3  1  Phill.  790.  *  2  Hare,  461. 


120         PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

they  do  not  think  it  right  to  make  a  subject  of  litigation, 
and  it  is  the  company,  as  a  company,  which  has  to  deter- 
mine whether  it  will  make  anything  that  is  wrong  to  the 
company  a  subject-matter  of  litigation,  or  whether  it  will 
take  steps  itself  to  prevent  the  wrong  being  done." 

Lord  Justice  Hellish,  observing  that  in  companies  things 
are  often  done  which  ought  not  to  be  done,  goes  on  to  say : 
"  Now,  if  that  gives  a  right  to  every  member  of  the  com- 
pany to  file  a  bill  to  have  the  question  decided,  then,  if  there 
happens  to  be  one  cantankerous  member,  or  one  member 
who  loves  litigation,  everything  of  this  kind  will  be  liti- 
gated, whereas  if  the  bill  be  filed  in  the  name  of  the  com- 
pany, then,  unless  there  is  a  majority  who  really  wish  for 
litigation,  the  litigation  will  not  go  on.  Therefore  holding 
that  such  suits  must  be  brought  in  the  name  of  the  com- 
pany does  certainly  greatly  tend  to  stop  litigation.  In  my 
opinion,  if  the  thing  complained  of  is  a  thing  which  in  sub- 
stance the  majority  are  entitled  to  do,  or  if  something  has 
been  done  irregularly  which  the  majority  of  the  company 
are  entitled  to  do  legally,  there  can  be  no  use  in  having 
a  litigation  about  it,  the  ultimate  end  of  which  is  only  that 
a  meeting  has  to  be  called,  and  then,  ultimately,  the  ma- 
jority gets  its  wishes.  Is  it  not  better  that  the  rule  should 
be  adhered  to  that  if  it  is  a  matter  which  the  majority  are 
masters  of,  the  majority  in  substance  shall  be  entitled  to 
have  their  will  fulfilled  ?  If  it  is  a  matter  of  that  nature, 
it  only  comes  to  this,  that  the  majority  are  the  only  per- 
sons who  can  complain  that  a  thing  which  they  are  entitled 
to  do  has  been  done  irregularly,  and  that,  as  I  understand 
it,  is  what  has  been  decided  by  the  cases  of  Mozley  v.  Alston 
and  Foss  v.  Harbottle.  In  my  opinion,  that  is  the  rule  that 
is  to  be  maintained.  Of  course,  if  the  majority  are  abusing 
their  powers,  and  are  depriving  the  minority  of  their  rights, 
that  is  an  entirely  different  thing,  and  there  the  minority 


SUITS  BY   SHAREHOLDERS.  121 

are  entitled  to  come  before  this  Court  to  maintain  their 
rights  ;  but  if  what  is  complained  of  is  simply  that  some- 
thing which  the  majority  are  entitled  to  do  has  been  done 
or  undone  irregularly,  then  I  think  it  is  quite  right  that 
nobody  should  have  a  right  to  set  that  aside,  or  to  insti- 
tute a  suit  in  chancery  about  it,  except  the  company 
itself." 

§  110.  Right  of  minority  shareholders  to  sue  to  rescind  trans- 
action voidable  for  fraud,  when  majority  are  the  -wrong-doers. 
—  A  shareholder's  suit  to  obtain  redress  for  wrongs  done 
the  corporation  by  or  through  promoters  would  ordinarily 
seek  one  of  two  remedies,  namely,  —  rescission  of  the  trans- 
action brought  in  question,  or  a  recovery  of  secret  profits 
obtained  by  the  promoters.  When  rescission  of  a  transac- 
tion is  sought  on  the  ground  of  fraud,  and  the  majority 
of  the  directors  and  shareholders  are  the  wrong-doers,  or 
in  collusion  with  the  wrong-doers,  so  that  they  are  not  fit 
persons  to  determine  as  against  the  minority  the  election 
of  the  corporation  to  affirm  or  set  aside  the  transaction, 
the  right  of  the  minority  to  bring  suit  seems  clear.1 

§  111.  In  Atwool  v.  Merryweather,2 —  where  a  fraudulent 
sale  of  mines  was  made  to  a  company  through  promoters, 
the  purchase  of  the  mines  being  the  only  thing  for  which 
the  company  was  incorporated,  and  the  whole  inception  of 
the  company  being  simply  a  scheme  to  confirm  a  purchase 
as  made  for  £7,000,  which  was  made  for  £4,000,  the  ma- 
jority of  the  shares  being  owned  or  controlled  by  the 

1  Meeker  v.  Winthrop  Iron  Co.,  17  Fed.  Rep.  48;  Meyer  v.  Stalen 
Island  Ry.  Co.,  7  N.  Y.  St.  Rep.  245;  Farmers1  Loan  tf  Trust  Co.  v. 
New  York  Sf  Northern  Ry.  Co.,  150  N.  Y.  410.     The  last  cited  case 
establishes  the  right  of  minority  shareholders  to  defend  a  suit  against 
the  corporation  on  an  executory  contract  when  the  corporation  is, 
through  the  fraud  of  the  majority  shareholders,  disabled  from  making 
a  proper  defence. 

2  5  Eq.  464,  n. 


122        PROMOTERS  AND   PROMOTION   OF  CORPORATIONS. 

wrong-doers,  it  was  held  that  the  minority  shareholders 
might  sue  to  set  the  purchase  aside.  "  If  I  were  to  hold," 
said  the  Vice-Chancellor,  "  that  no  bill  could  be  filed  by 
shareholders  to  get  rid  of  the  transaction  on  the  ground  of 
the  doctrine  of  Foss  v.  Harbottle,  it  would  be  simply  impos- 
sible to  set  aside  a  fraud  committed  by  a  director  under 
such  circumstances,  as  the  director  obtaining  so  many 
shares  by  fraud  would  always  be  able  to  outvote  everybody 
else." 

§  112.  in  Mason  v.  Harris,1  —  the  defendant  Harris  was  a 
promoter  of  a  company  formed  to  purchase  from  him  a  cer- 
tain business  and  property  employed  therein.  It  was 
agreed  that  the  company  should  pay  a  stated  price  for  the 
property,  and  that  for  the  good-will  of  the  business  it  should 
pay  a  sum  equal  to  the  profits  of  the  business  for  the  pre- 
ceding year.  The  purchase  price  was  payable  partly  in 
money  and  partly  in  paid-up  shares  of  the  company. 
Harris  represented  that  the  profits  of  the  business  for  the 
two  years  in  question  had  amounted  to  £ 3,511,  and  the 
transaction  was  carried  out  on  that  basis.  Subsequently,  it 
was  discovered  that  Harris's  representation  was  false  and 
fraudulent,  and  that  the  profits  had  been  but  a  little  over 
,£300  a  year.  Two  shareholders  of  the  company  then 
brought  suit  to  set  aside  the  purchase,  alleging  that  the 
board  of  directors  was  controlled  by  Harris,  and  refused  to 
take  any  steps  with  reference  to  the  matter  complained  of, 
and  that  Harris  possessed  such  a  preponderance  of  votes 
that  no  steps  could  successfully  be  taken  within  the  company 
to  obtain  a  remedy  for  the  wrong  committed.  A  demurrer 
to  the  bill  was  overruled.  "  As  a  general  rule,"  said  Jessel, 
M.  R.,  "  the  company  must  sue  in  respect  of  a  claim  of  this 
nature ;  but  general  rules  have  their  exceptions,  and  one 
exception  to  the  rule  requiring  the  company  to  be  plaintiff 

1  11  Ch.  D.  97. 


SUITS   BY  SHAKEHOLDEES.  123 

is,  that  where  a  fraud  is  committed  by  persons  who  can 
command  a  majority  of  votes,  the  minority  can  sue.  The 
reason  is  plain,  as  unless  such  an  exception  were  allowed,  it 
would  be  in  the  power  of  a  majority  to  defraud  the  minority 
with  impunity.  If  the  majority  were  to  make  a  fraudulent 
sale  and  put  the  money  into  their  own  pockets,  would  it  be 
reasonable  to  say  that  the  majority  could  confirm  the  sale  ? " 
James,  L.  J.,  said:  "  I  am  of  the  same  opinion.  No  judge 
has  ever  laid  down  more  strongly  than  I  the  rule  that  in 
general  in  these  cases  the  company  must  be  the  plaintiff. 
But  an  exception  to  that  rule  was  established  by  Atwool  v. 
Merry  weather?-  and  this  case  is  within  it.  It  has  been  sug- 
gested that  the  Court  has  some  means  of  directing  a  meet- 
ing to  be  called  in  which  the  corrupt  shareholders  shall  not 
be  able  to  vote.  If  the  Court  had  any  such  power,  that 
mode  of  proceeding  might  furnish  the  best  remedy  in  cases 
of  this  nature,  but  I  cannot  see  how  any  directions  for  hold- 
ing such  a  meeting  could  be  given." 

§  113.  Right  of  minority,  where  majority  are  not  the  wrong- 
doers, to  sue  to  rescind  contracts  voidable  for  fraud.  —  When 
rescission  of  a  transaction  is  sought  on  the  ground  of  fraud, 
and  the  majority  shareholders  are  not  the  wrong-doers  or 
in  collusion  with  the  wrong-doers,  minority  shareholders 
have  no  standing  to  sue  for  rescission,  unless  the  ratifica- 
tion of  the  transaction  would  be  illegal,  fraudulent,  or 
oppressive  toward  them.  Rescission  involves  the  surrender 
of  property,  or  the  release  of  rights  acquired  by  the  corpo- 
ration through  the  transaction  sought  to  be  rescinded. 
The  corporation,  by  the  vote  of  the  majority  of  its  share-* 
holders  acting  fairly,  in  good  faith,  and  intra  vires,  is  enti- 
tled to  determine  for  itself  exclusively,  whether  it  will 
retain  or  release  property  or  rights  thus  acquired,  although 
it  thereby  precludes,  or  renders  ineffectual,  all  proceedings 

1  5  Eq.  464,  n. 


124    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

against  parties  who  may  have  made  illegal  or  fraudulent 
gains  out  of  the  transaction.1 

§  114.  Thus,  in  FOBS  v.  Harbottle,2  —  a  demurrer  was  sus- 
tained to  a  bill  filed  by  two  shareholders  in  a  company  in 
behalf  of  themselves  and  other  shareholders,  against  the 
directors  of  the  company  and  others,  charging  the  defend- 
ants with  concerting  and  effecting  various  fraudulent  and 
illegal  transactions,  whereby  the  property  of  the  company 
was  misapplied  and  wasted,  and  praying  that  the  defend- 
ants might  be  decreed  to  make  good  to  the  company  the 
losses  and  expenses  occasioned  by  the  acts  complained  of. 
One  alleged  ground  of  complaint  was  that  the  defendant 
directors  had,  in  their  character  of  directors,  purchased 
their  own  lands  of  themselves  for  the  use  of  the  company, 
and  had  paid  for  them,  or,  rather,  taken  to  themselves,  out 
of  the  moneys  of  the  company,  a  price  exceeding  the  value 
of  such  lands.  This  "  ground  of  complaint,"  said  the  Vice- 
Chancellor,  "  is  one  which  though  it  might  prima  facie 
entitle  the  corporation  to  rescind  the  transactions  com- 
plained of,  does  not  absolutely  and  of  necessity  fall  under 
the  description  of  a  void  transaction.  The  corporation 
might  elect  to  adopt  those  transactions  and  hold  the  direc- 
tors bound  by  them.  In  other  words,  the  transactions 
admit  of  confirmation  at  the  option  of  the  corporation,  .  .  . 
whilst  the  Court  may  be  declaring  the  acts  complained  of 
to  be  void  at  the  suit  of  the  present  plaintiffs,  who  in  fact 
may  be  the  only  proprietors  who  disapprove  of  them,  the 
governing  body  of  proprietors  may  defeat  the  decree  by  law- 
fully resolving  upon  the  confirmation  of  the  very  acts  which 
are  the  subject  of  the  suit.  The  very  fact  that  the  govern- 
ing body  of  proprietors  assembled  at  the  special  general 

1  Brewer  v.   Boston  Theatre  Co.,  104  Mass,   at  p.  394  ;  Clinch  v. 
Financial  Corporation,  5  Eq.  at  p.  482. 

2  2  Hare,  461. 


SUITS  BY  SHAREHOLDERS.  125 

meeting  may  so  bind  even  a  reluctant  minority,  is  decisive 
to  show  that  the  frame  of  this  suit  cannot  be  sustained 
whilst  that  body  retains  its  functions." 1 

§  115.  Right  of  minority  to  sue  to  rescind  a  voidable  trans- 
action where  there  is  no  fraud.  —  When  a  transaction  with 
promoters  is  voidable  by  the  corporation,  on  account  of  the 
personal  interest  of  the  promoters,  but  there  is  no  actual 
fraud  or  unfairness  in  it,  it  would  seem  that  although  they 
own  or  control  a  majority  of  the  stock,  and  thus  are  en- 
abled to  outvote  the  minority,  the  latter  are  not  entitled 
to  sue  to  rescind  the  transaction.2  Thus  in  North  West 
Transportation  Go.  v.  Beatty?  the  plaintiff,  as  a  share- 
holder in  the  North  West  Transportation  Company,  sued 
in  behalf  of  himself  and  all  the  other  shareholders  of  the 
company,  except  those  who  were  defendants.  The  de- 
fendants were  the  company,  and  five  shareholders  who, 
at  the  commencement  of  the  action,  were  the  directors  of 
the  company.  The  claim  in  the  action  was  to  set  aside 
a  sale  made  to  the  company  by  the  defendant  Beatty,  one 
of  the  directors  of  a  steamer  called  the  "  United  Empire," 
of  which,  previously  to  such  sale,  he  was  the  sole  owner. 

1  It  did  not  appear  by  the  bill  that  the  company  was  entitled  to 
claim  the  profits  made  by  the  directors  on  the  sale  to  the  com- 
pany. 

2  Hill  v.  Nisbett,  100  Ind.  341  ;  Havens  v.  Hoyt,  6  Jones  Eq.  (N.  C.) 
115  ;  Shaw  v.  Davis,  78  Md.  308.     In  Gamble  v.  Queen's  County  Water 
Co.  123  N.  Y.  99,  it  was  held  that  one  who  has  entered  into  a  voidable 
contract  with  a  company  is  entitled  to  exercise  his  voting  power  as  a 
shareholder  in  general  meeting  to  ratify  such  contract.     His  doing  so 
cannot  be  deemed  oppressive  by  reason  of  his  individually  possessing  a 
majority  of  the  shares  acquired  in  a  manner  authorized  by  the  consti- 
tution of  the  company.     But  if  the  action  resulting  from  his  vote  is  a 
wanton  or  fraudulent  destruction  of  the  rights  of  the  minority,  it  may 
be  subjected  to  the  scrutiny  of  a  Court  of  Equity  at  the  suit  of  the 
minority  shareholders. 

•  12  App.  Cas.  589. 


126    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

It  appeared  that  a  by-law  for  the  purchase  of  the  "  United 
Empire  "  from  Beatty  was  passed  by  the  directors.  Sub- 
sequently this  by-law  was  adopted  at  a  meeting  of  the 
shareholders  by  a  majority  of  votes,  and  the  steamer  was 
purchased  by  the  company.  Beatty  held  and  voted  a 
majority  of  the  shares  of  the  company.  The  contract 
was  a  fair  one,  within  the  powers  of  the  company,  and 
free  from  imputation  of  fraud.  It  was  held  that  the  de- 
fendant was  entitled  to  exercise  his  voting  power  as  a 
shareholder  in  general  meeting  to  ratify  the  contract,  and 
that  accordingly  the  plaintiff's  action  was  not  maintainable. 

§  116.  Right  of  minority  to  sue  for  recovery  of  secret  profits 
obtained  by  promoters.  —  When  secret  profits  have  been 
obtained  by  promoters  under  circumstances  entitling  the 
company  to  claim  them,  the  right  of  the  majority  share- 
holders to  determine,  as  against  the  minority,  that  no 
steps  shall  be  taken  for  their  recovery,  must  depend  upon 
whether  or  not  that  determination  would  be  fraudulent  or 
oppressive  towards  the  minority.  If  it  would  have  been 
competent  for  the  majority  of  the  shareholders,  in  the  first 
instance,  in  case  the  profits  had  been  disclosed,  instead  of 
concealed,  to  allow  them,  then,  doubtless,  it  would  be  within 
the  power  of  a  disinterested  majority,  on  discovering  the 
facts,  to  confirm  the  transaction. 

§  117.  Majority  not  allowed  to  retain  profits  -wrongfully 
obtained  at  expense  of  minority. — The  majority  will  not 
be  allowed  to  put  into  their  own  pockets  profits  wrongfully 
obtained  at  the  expense  of  the  minority.1  This  is  illus- 
trated in  Menier  v.  Hooper's  Telegraph  Works.2  A  bill 
was  filed  in  this  case  by  the  plaintiff,  a  minority  share- 
holder, in  behalf  of  himself  and  all  other  shareholders  of 

1  Hazard  v.Durant,  11  R.  I.  195  ;  First  National  Bank  of  Fort  Scott 
v.  Drake,  29  Kan.  311. 

2  9  Ch.  350. 


SUITS   BY   SHAKEHOLDERS.  127 

the  European  and  South  American  Telegraph  Company, 
except  such  of  them  as  were  defendants,  against  the  com- 
pany and  a   company  called  Hooper's    Telegraph  Works 
and   others.     The   European   Company   was   incorporated 
with  the  object  of  carrying  out  an   agreement   between 
the  plaintiff  and  others  for  constructing  a  submarine  tele- 
graph under  certain  concessions  from  foreign  governments. 
Hooper's  Company  was  to  contract  for  laying  down  the 
European   Company's   telegraph   cable   from   Portugal  to 
Brazil.    Hooper's  Company  owned  a  majority  of  the  shares 
of  the  European  Company.     One  of  the  concessions  for 
making  the  telegraph  had  been  granted  to  the  Baron  de 
Maua,  who  was  at  one  time  chairman  of  the  European 
Company,  and  this  concession  was  claimed  by  that  com- 
pany, and  a  bill  was  filed  by  it,  praying  a  declaration  that 
he  was  a  trustee  of  the  concession  for  it.      Hooper's  Com- 
pany  procured    an    abandonment   of    this    suit,   and  the 
winding  up   of   the   European   Company.     As   a   part  of 
this  transaction,  an  arrangement  was  made  by  Hooper's 
Company,  the  Baron  de  Maua,  and  a  company  in  which  he 
was  interested,  by  reason  of  which  it  was  to  the  advantage 
of  Hooper's  Company  and  the  Baron  de  Maua,  that  the 
agreement  with  the  European  Company  should  be  put  an 
end  to,  in  order  that  Hooper's  Company  might  sell  to  the 
Baron  de  Maua's  company  the  cable  it  was  making  for 
the  European  Company.     The  bill  prayed  that  Hooper's 
Company  might  be  declared  not  entitled  to  the  benefit  of 
the  profits  derived  by  it  from  the  abandonment  of  the  suit 
and  other  arrangements  as  above  stated,  and  might  be 
declared  a  trustee  of  those  profits  for  the  plaintiff  and  the 
other  shareholders  of  the  European  Company.    A  demurrer 
to  the  bill  was  overruled.     "  It  so  happens,"  said  Hellish, 
L.  J.,  "  that  Hooper's  Company  are  the  majority  in  this 
company,  and  a  suit  by  this  company  was  pending  which 


128        PROMOTERS  AND   PROMOTION  OF  CORPORATIONS. 

might  or  might  not  turn  out  advantageous  to  this  com- 
pany. The  plaintiff  says  that  Hooper's  Company,  being 
the  majority,  have  procured  that  suit  to  be  settled  upon 
terms  favorable  to  themselves,  they  getting  a  consideration 
for  settling  it  in  the  shape  of  a  profitable  bargain  for  the 
laying  of  a  cable.  I  am  of  opinion  that  although  it  may 
be  quite  true  that  the  shareholders  of  a  company  may  vote 
as  they  please,  and  for  the  purpose  of  their  own  interests, 
yet  that  the  majority  of  shareholders  cannot  sell  the  assets 
of  the  company,  and  keep  the  consideration,  but  must  allow 
the  minority  to  have  their  share  of  any  consideration  which 
may  come  to  them.  I  also  entirely  agree  that,  under  the 
circumstances,  the  suit  is  properly  brought  in  the  name 
of  the  plaintiff  on  behalf  of  himself  and  all  the  other 
shareholders." 

§  118.  Right  of  minority  to  sue  for  recovery  of  promoter's 
profits  on  sale  to  corporation  at  fraudulently  excessive  price. 
—  If  secret  profits  have  been  obtained  by  promoters  by 
fraudulently  swelling  the  purchase  price  of  property  sold 
to  the  company,  an  excessive  price  having  been  charged  in 
order  that  such  profits  might  be  secured  at  the  expense  of 
the  corporation,  it  would  ordinarily  not  be  competent  for 
the  majority,  as  against  dissenting  shareholders,  to  prevent 
a  suit  for  their  recovery.  Especially  would  this  be  so  when 
the  promoters  themselves  owned  or  controlled  a  majority 
of  the  shares,  for  to  hold  otherwise  would  be  to  permit  the 
majority  fraudulently  to  enrich  themselves  at  the  expense 
of  the  minority.  In  Mason  v.  Harris,1  where  a  promoter, 
by  means  of  fraudulent  misrepresentations,  sold  property 
to  a  company  at  a  great  over-value,  and  a  suit  was  brought 
by  minority  shareholders  to  rescind  the  sale,  it  was  said  by 
Jessel,  M.  R.,  that  a  recovery  ought  to  be  had  by  the  com- 
pany, even  if  the  purchase  were  not  rescinded,  but  affirmed. 

1  11  Ch.  D.  97. 


SUITS   BY   SHAREHOLDERS.  129 

S  119.  Shareholder  -whose  shares  have  been  voted  on  in 
favor  of  a  transaction  cannot  maintain  suit  based  upon  it.  — 
A  shareholder  has  no  standing  to  bring  suit,  if  his  shares 
have  been  voted  on  by  a  previous  holder  in  favor  of  the 
transaction  complained  of,  or  if,  at  the  time  when  the  trans- 
action was  entered  into,  the  then  holder  of  such  shares 
participated  or  acquiesced  in  the  transaction.1  "This," 
observes  Mr.  Cook,  "  is  a  very  important  principle  of  law, 
and  defeats  many  suits  instituted  by  stockholders  to 
remedy  past  wrongs."  2 

§  120.  Rule  in  Federal  Courts.  —  In  the  Federal  Courts,  a 
shareholder  cannot  maintain  a  suit  to  obtain  redress  for  a 
wrong  to  the  corporation  committed  before  he  became  a 
shareholder,  unless  his  share  has  devolved  on  him  by 
operation  of  law.  By  Equity  Rule  94,  "  Every  bill  brought 
by  one  or  more  stockholders  in  a  corporation  against  the 
corporation  and  other  parties,  founded  on  rights  which 
may  properly  be  asserted  by  the  corporation,  must  be  veri- 
fied by  oath,  and  must  contain  an  allegation  that  the  plain- 
tiff was  a  shareholder  at  -the  time  of  the  transaction  of 
which  he  complains,  or  that  his  share  has  devolved  on 
him  since  by  operation  of  law."  3 

§  121.  Shareholder's  suit  may  be  barred  by  laches. —  The 
right  of  shareholders  by  suit  to  complain  of  transactions 
with  the  corporation,  which  are  voidable  on  account  of  the 
actual  or  constructive  fraud  of  promoters,  may  be  lost  by 
laches.  If  the  delay  has  been  unreasonable  and  so  great 

1  In  re  Syracuse,  Chenango,  fyNew  York  R.R.  Co.,  91  N.  Y.  1 ;  Barr 
v.  New  York,  Lake  Erie,  Sf  Western  R.  R.  Co.,  125  N.  Y.  263 ;  Wood  v. 
Cory  Waterworks  Co.,  44  Fed.  Rep.  146;  Brown  v.  ,Duluth,  ifc.  R.  R. 
Co.,  53  Fed.  Rep.  889  ;  Clark  v.  American  Coal  Co.,  86  Iowa,  451.     It 
is  held  in  Georgia  that  a  subsequent  shareholder  cannot  in  any  event 
complain,  Alexander  v.  Searcy,  81  Ga.  536. 

2  Cook  on  Stockholders,  Sect.  735. 

8  Dimpfel  v.  Ohio  If  Mississippi  R.  R.  Co.,  110  U.  S.  209. 

9 


130        PROMOTERS   AND  PROMOTION   OF   CORPORATIONS. 

as  to  constitute  acquiescence,  or  if  other  rights  have  inter- 
vened which  it  would  be  inequitable  to  destroy,  a  Court  of 
Equity  will  refuse  to  grant  the  relief  sought.  What  will 
constitute  such  laches  as  to  preclude  relief  must  depend 
upon  the  circumstances  of  each  case.1 

§  122.  Form  of  shareholder's  suit.  —  Necessary  parties.  — 
When  shareholders  sue  to  assert  corporate  rights,  or  to 
remedy  corporate  wrongs,  they  must  bring  suit  in  behalf  of 
themselves  and  all  other  shareholders  not  made  parties  de- 
fendant who  may  come  in  and  join  in  the  suit.  A  share- 
holder does  not  sue  in  his  own  right.2  The  real  complainant 
is  the  corporation,  which  is  represented  in  the  prosecution 
of  the  suit  by  the  shareholder  as  the  nominal  complainant. 
The  corporation,  therefore,  is  an  indispensably  necessary 
party  defendant,  in  order  that  it  may  be  bound  by  the 
decree,  and  that  the  relief  prayed  for,  if  obtained,  may  be 
decreed  to  it.3 

1  Catlin  v.  Green,   120  N.  Y.  441 ;  Watt's  Appeal,  78  Perm.  370 ; 
Davis  v.  Gemmell,  70  Md.  356  ;  Peabody  v.  Flint,  6  Allen,  52  ;  Dunphy 
v.  Traveller  Newspaper  Association,  146  Mass.  495 ;  Snow  v.  Boston  Blank 
Book  Mfg.  Co.,  153  Mass.  456,  158  Mass.  325;  Gregory  v.  Patchett,  33 
Beav.  595  ;  Dimpfel  v.  Ohio  ft  Mississippi  R.  R.  Co.,  110  U.  S.  209. 

2  Bailey  v.  Birkenhead  Railway   Co.,   12   Beav.   433  ;    Winsor  v. 
Bailey,  55  N.  H.  218 ;  Cunningham  v.  Pell,  5  Paige,  607. 

8  Willoughby  v.  Chicago  Junction  Railways,  50  N.  J.  Eq.  656  ;  3 
Pomeroy's  Eq.  Juris.  Sect.  1095. 


LIABILITY   OF   PROMOTERS  TO   SHAREHOLDERS. 


131 


CHAPTER    VII. 

LIABILITY  OF  PROMOTERS  TO  ACCOUNT  FOR  PROFITS,  COMMIS- 
SIONS, AND  GIFTS,  OR  IN  DAMAGES  TO  SHAREHOLDERS  OF 
THE  CORPORATION. 

ARTICLE  I.  —  Liability  to  account  for  Profits,  Crifts,  and 
Commissions. 

ARTICLE  II.  —  Liability  in  Damages  when  in  a  Fiduciary 
Position  toward  Shareholders. 

ARTICLE  III.  —  Liability   in   Damages   when   not   in    a 
Fiduciary  Position   toward   Shareholders. 

ARTICLE  I.  —  LIABILITY  TO  ACCOUNT  FOR  PROFITS,  GIFTS,  AND 
COMMISSIONS. 


123.  Effect  of  invitation  by  pro- 
moters to  others  to  join 
them  in  acquiring  property, 
and  to  become  shareholders 
in  corporation  to  be  formed 
to  purchase  it. 


§  124.  Emery  v.  Parrott,  107  Mass. 
96. 

125.  Getty  v.    Devlin,    64  N.   Y. 

403;  70  N.  Y.  504. 

126.  Kule  as  to  joinder  of  plain- 

tiffs in    suit    against    pro- 
moters  for  an  accounting. 


§  123.  Effect  of  invitation  by  promoters  to  others  to  join 
them  in  acquiring  property,  and  to  become  shareholders  in 
corporation  to  be  formed  to  purchase  it.  —  When  pro- 
moters are  liable  to  account  for  secret  profits,  they  are, 
as  a  rule,  accountable  only  to  the  corporation.  They  may, 
however,  under  some  circumstances,  be  accountable  to 
the  shareholders  of  the  corporation  to  their  separate  use. 
It  is  a  rule  that  when  a  person  is  concerned  in  a  trans- 
action in  which  he  is  acting  for  himself  and  his  future 
partners,  as  an  agent  for  the  intended  partnership,  he 
is  not  permitted  to  take  advantage  of  his  situation,  in 
order  to  obtain  a  personal  benefit  for  himself ;  and  that 


132   PKOMOTEES  AND  PROMOTION  OF  COKPOEATIONS. 

when  he  does  obtain  such  a  benefit  it  will  be  deemed 
that  he  holds  it  in  trust  for  the  partnership.1  On  the 
principle  of  this  rule,  if  promoters  invite  others  to  join 
with  them  on  terms  of  equality  in  acquiring  property 
with  a  view  to  the  profit  to  be  made  from  it  by  organiz- 
ing to  work  it  a  corporation  to  be  comprised  of  the  asso- 
ciates, and  the  invitation  is  accepted,  from  that  moment 
the  associates  are  in  a  fiduciary  relation,  and  one  will 
not  be  allowed,  while  acting  for  himself  and  his  associates, 
to  make  a  profit  in  the  common  enterprise  at  the  expense 
of  the  others.2  All  profits  thus  obtained  he  must  share 
with  his  associates.  The  cases  in  which  shareholders 
of  a  corporation  have  maintained  suits  to  recover  to  their 
individual  use,  profits  from  promoters,  fall  within  this 
principle.  In  these  cases,  the  standing  of  the  plaintiffs 
was  not  that  of  mere  shareholders  of  the  corporation ; 
it  was  that  of  associates  with  the  promoters  in  a  common 
enterprise,  prior  to  the  formation  of  the  corporation,  the 
incorporation  being  an  incident  of  the  enterprise. 

§  124.  in  Emery  v.  Parrott,8  —  the  facts  were  these : 
Archbold,  who  owned  a  coal  mine,  communicated  to  the 
defendants  Head  and  Parrott  his  desire  to  sell  the  mine 
to  a  corporation  to  be  formed  to  buy  and  work  it,  and 
he  promised  to  give  them  a  certain  part  of  the  price 
which  he  might  thus  obtain,  if  they  would  procure  the 
formation  of  a  corporation  and  the  purchase  of  the  mine 
by  it.  Parrott  then  induced  the  plaintiffs  to  join  with 
him  in  acquiring  the  mine ;  and  in  behalf  of  himself  and 
his  associates  he  conducted  various  negotiations  with 

1  Fawcett  v.  Whilehouse,  1  Russ.  &  Myl.  132  ;  Colt  v.  Clapp,  127 
Mass.  476. 

2  Short  v.  Stevenson,  63  Penn.  95;  Dole  v.   Wooldredge,  135  Mass. 
140.     And  if  he  has  himself  purchased  the  property,  his  associates  will 
be  entitled  to  share  in  the  benefit  of  his  purchase. 

8  107  Mass.  96. 


LIABILITY   OF   PEOMOTEKS   TO   SHAREHOLDER.  133 

Archbold,  which  resulted  in  a  contract  between  Archbold 
and  the  associates  to  this  effect,  that  the  parties  should 
form  a  corporation  with  a  capital  stock  of  $150,000,  half 
of  which  should  be  subscribed  by  Archbold,  and  half 
by  the  associates,  and  that  the  corporation  should  buy 
the  mine  for  $75,000,  spend  $70,000  in  improvements 
and  machinery,  and  reserve  the  other  $5,000  for  work- 
ing capital.  The  provisions  of  this  contract  were  sub- 
stantially carried  out ;  the  corporation  was  formed  ;  the 
mine  was  conveyed  to  it;  certificates  of  its  stock  to  the 
amount  of  $75,000  were  issued  to  Archbold  in  payment 
of  the  purchase  price  ;  and  the  associates  furnished  the 
required  cash  capital.  Archbold  then  transferred  112 
shares  of  his  stock  to  Parrott,  and  113  shares  to  Head, 
as  a  commission  for  their  services.  The  plaintiffs,  sub- 
sequently discovering  the  secret  arrangement  by  which 
Parrott  and  Head  received  these  shares,  brought  a  bill 
in  equity  against  them,  which  resulted  in  a  decree  to 
the  effect  that  the  plaintiffs  were  entitled  to  share  in 
the  stock  received  by  the  defendants  from  Archbold,  and 
also  in  the  dividends  which  the  defendants  had  received 
on  the  stock. 

§  125.  In  Getty  v.  Devlin,1  —  the  following  facts  appeared : 
Bryan  was  the  owner  of  leasehold  interests  in  certain 
lands  in  the  State  of  Ohio,  which  he  had  bought  for 
about  $15,000  and  paid  for  with  his  own  moneys.  Bryan 
and  Arkenburg  held  contracts  for  the  purchase  of  other 
lands  in  Ohio  for  $15,000.  In  this  condition  of  things, 
the  following  scheme  was  entered  into  by  Bryan,  Arken- 
burg, Atwood,  and  Devlin,  who  were  the  defendants  in 
the  case.  Devlin  was  to  pay  Bryan  $7,650  for  one  half 
the  interest  the  latter  then  had  in  the  property  in  question. 
An  association  was  to  be  formed  to  which  all  the  property 

1  54  N.  Y.  403 ;  70  N.  Y.  504. 


134    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

should  be  sold  for  $125,000.  Atwood  was  to  receive  one- 
third  of  the  profit  arising  from  the  sale,  and  out  of  the 
residue  of  the  proceeds  the  original  cost  of  the  property 
was  to  be  paid  to  Devlin,  Arkenburg,  and  Bryan,  and  the 
remainder  divided  equally  between  them.  In  pursuance 
of  this  scheme  the  defendants  then  prepared  the  following 
paper  :  — 

"  We  the  undersigned,  do  hereby  subscribe  and  agree  to  pay  forth- 
with the  amount  set  opposite  our  names  for  the  purchase  of  property 
in  Washington,  Monroe,  and  Athens  Counties,  Ohio,  as  per  mem- 
orandum annexed,  being  leasehold  interest  in  745  acres,  and  207  acres 
in  fee,  at  the  sum  of  $125,000,  payments  to  be  made  to  Daniel  Devlin, 
Esq.,  at  Broadway  Bank,  trustee  for  the  purchasers,  in  whose  name 
the  title  to  property  shall  be  taken,  said  property  to  be  put  into  an 
association  for  development  upon  such  terms  as  these  subscribers 
may  elect  after  this  subscription  is  complete." 

This  paper  was  subscribed  by  the  defendants  for  $5,000 
each,  and  it  was  then  left  with  Atwood  to  procure  sub- 
scriptions. The  plaintiffs  subscribed  on  the  assurance 
that  the  property  cost  $125,000.  The  interest  of  the 
defendants  was  concealed  ;  they  subscribed  for  shares  to 
the  amount  of  $60,000  for  the  purpose  of  filling  up  the 
subscription ;  they  gave  away  in  decoy  subscriptions  about 
half  of  the  amount  to  be  subscribed.  Subscriptions  to 
the  amount  of  $65,000  were  paid  to  Devlin,  but  the  de- 
fendants paid  nothing.  After  the  subscriptions  had  been 
made,  a  meeting  of  the  subscribers  was  held,  and  a  cor- 
poration organized.  Bryan,  who  then  held  the  title  to 
the  lands,  conveyed  them  to  the  corporation,  receiving 
in  payment  certificates  for  all  the  shares  of  the  capital 
stock.  These  shares  he  transferred  to  Devlin  in  trust 
for  all  the  subscribers  of  the  subscription  paper  here- 
tofore mentioned,  and  with  the  exception  of  a  certain 
number  reserved  for  working  capital,  they  were  distributed 
pro  rata  among  the  subscribers.  The  result  of  the  enter- 


LIABILITY  OP  PROMOTEKS   TO   SHAREHOLDERS. 


135 


prise,  shortly  stated,  was  that  the  four  defendants  shared 
secret  profits  to  the  amount  of  $30,000  in  money,  besides 
having  as  much  stock  as  had  those  who  paid  their  sub- 
scriptions in  cash.  On  a  bill  in  equity  brought  by  the 
plaintiffs,  it  appearing  that  rescission  was  impossible,  the 
real  estate  having  been  seized,  and  sold  to  satisfy  a  debt 
due  from  the  company,  it  was  held  that  the  defendants 
must  account  for  the  profits  which  they  had  fraudulently 
appropriated  to  the  exclusion  of  their  associates,  and  that 
the  plaintiffs  were  entitled  to  recover  their  pro  rata  share 
thereof. 

§  126.  Rule  as  to  joinder  of  plaintiffs  in  suit  against  pro- 
moters for  an  accounting.  —  When  the  misrepresentation 
made  by  the  promoters  as  to  the  cost  of  the  property  has 
been  made  to  the  whole  company,  and  not  to  the  parties 
separately  and  individually,  if  an  action  at  law  can  be 
maintained,  it  is  not  plain  whether  the  plaintiffs  should 
join  in  the  action,  or  whether  each  should  bring  an 
action  to  recover  the  damages  he  has  sustained.  But 
the  injured  parties  may  join  in  a  bill  in  equity  for  an 
accounting.1 


ARTICLE  IT. — LIABILITY    IN    DAMAGES  WHEN    IN  A   FIDUCIARY 
POSITION  TOWARD   SHAREHOLDERS. 


§  127.  When  such  relation  exists 
between  promoters  and 
shareholders,  former  li- 
able to  latter  in  damages 
for  breach  of  fiduciary 
duty  to  them. 


§  128.    Brewster  v.  Hatch,  122  N. 

Y.  349. 

129.    Teachout  v.  Van  Hoesen,  76 
Iowa,  113. 


§  127.  When  fiduciary  relation  exists,  promoters  liable  in 
damages  to  shareholders  for  breach  of  fiduciary  duty  to 
them.  —  While  promoters  stand  in  a  fiduciary  position 


Dole  v.  Wooldredge,  135  Mass.  140. 


136        PROMOTERS  AND   PROMOTION   OF  CORPORATIONS. 

toward  the  corporation,  they  do  not,  as  a  rule,  occupy 
that  position  toward  the  subscribers  for  shares.  A  breach 
of  fiduciary  duty  by  the  promoters  is  ordinarily  a  breach  of 
such  duty  to  the  corporation  only ;  the  injury  occasioned 
thereby  is  to  the  corporation,  —  that  is,  to  the  shareholders 
collectively,  and  not  individually,  and  the  remedy  is  there- 
fore worked  out  through  the  corporation.  But,  as  we  have 
already  seen,  the  promoters  may  by  their  acts  create  a 
fiduciary  relation  between  themselves  and  the  subscribers 
for  shares.  In  such  event  it  is  incumbent  upon  them  to 
fully  disclose  all  material  facts  within  their  knowledge 
touching  the  proposed  enterprise.  If  they  are  to  receive 
profits  or  commissions,  at  the  expense  of  the  subscribers,  it 
is  their  duty  to  disclose  that  fact.  A  failure  to  make  proper 
disclosure  which,  if  made,  would  have  led  the  subscribers 
to  decline  to  take  shares,  will  enable  the  subscribers  to  re- 
cover their  damages  from  the  promoters.  And  this  is  also 
true  when  the  subscribers  have  been  induced  to  become 
such  by  misrepresentations  as  to  cost  or  value,  although 
misrepresentations  of  this  nature  may  not  be  actionable 
when  the  parties  are  not  in  a  fiduciary  relation,  but  stand 
merely  as  vendor  and  vendee.1 

§  128.  in  Brewater  v.  Hatch,2  —  the  defendants  associated 
themselves  together  to  get  up  a  corporation  to  acquire  cer- 
tain mining  property  wholly  at  the  cost  of  such  persons  as 
they  might  induce  to  take  and  pay  for  shares  of  stock. 
Having  procured  an  option  for  the  purchase  of  the  prop- 
erty in  the  name  of  Brown,  one  of  their  number,  they  sent 
out  a  prospectus  and  a  subscription  agreement.  It  was  set 
out  in  this  agreement  that  a  corporation  with  a  capital  stock 
of  $1,500,000  was  about  to  be  organized  for  the  purpose  of 
acquiring  title  to  the  property  referred  to  ;  that  all  of  the 

1  Cheney  v.  Gleason,  125  Mass.  166. 

2  122  N.  Y.  349. 


LIABILITY   OF  PKOMOTEES  TO   SHAKEHOLDERS.  137 

stock  was  to  be  issued  to  Brown  in  payment  for  the  property ; 
and  that  Hatch,  one  of  the  defendants,  would,  as  trustee 
for  the  subscribers,  receive  moneys  due  on  subscriptions, 
and  hold  the  same  to  pay  over  to  Brown  upon  the  delivery 
of  a  deed  of  the  property  in  question,  from  him  to  the  cor- 
poration, and  the  transfer  by  him  to  the  subscribers  of  the 
number  of  shares  of  stock  respectively  subscribed  for  by 
them.  By  the  terms  of  the  agreement,  the  subscribers 
thereto  covenanted  with  Brown  that  they  would  accept  the 
shares  to  be  transferred  to  them  by  Brown,  and  that  they 
would  make  payment  for  the  same  to  Hatch,  at  the  rate  of 
four  dollars  per  share  on  the  trust  stated.  Subscriptions 
having  been  received  from  the  plaintiffs  and  others  for  about 
sixty-one  thousand  shares  at  the  price  agreed  upon,  the 
defendants  proceeded  to  organize  the  corporation,  naming 
themselves  as  trustees  for  the  first  year.  Brown  thereupon 
completed  the  purchase  of  the  property  in  his  own  name,  and 
immediately  conveyed  it  to  the  corporation ;  all  the  shares 
of  stock  were  issued  to  him,  and  he  transferred  to  the  sub- 
scribers the  number  of  shares  for  which  they  had  respec- 
tively subscribed.  The  money  which  the  subscribers  had 
paid  to  Hatch  was  then  applied  in  payment  of  a  loan  which 
the  defendants  had  obtained,  in  order  to  enable  Brown  to 
pay  the  purchase  price  of  the  property,  when  it  was  con- 
veyed to  him.  After  paying  the  cost  of  the  purchase  and 
other  expenses,  the  defendants  had  remaining  on  hand 
58,235  shares  of  stock  for  which  they  had  paid  nothing, 
and  which  they  appropriated  to  their  own  use.  When  the 
plaintiffs  received  and  paid  for  their  stock,  they  had  no 
knowledge  that  the  defendants  were  to  have  shares  without 
paying  for  them.  In  an  action  by  the  plaintiffs  to  recover 
damages,  it  was  held  that  they  were  entitled  to  recover,  on 
the  ground  that  the  relation  between  the  parties  was  not 
that  of  vendors  and  vendees  simply,  but  was  of  a  fiduciary 


138        PROMOTERS  AND   PROMOTION  OF   CORPORATIONS. 

nature,  binding  the  defendants  to  the  exercise  of  good  faith 
and  imposing  on  them  the  duty  of  disclosure.  The  invitation 
extended  by  the  defendants  to  the  plaintiffs,  it  will  be  ob- 
served, was  not  in  behalf  of  the  projected  corporation  to 
enter  into  a  contract  with  the  corporation,  when  formed, 
to  take  from  it  shares  of  its  capital  stock,  but  was  in  effect 
to  become  associated  with  the  defendants  on  terms  of 
equality  in  a  common  enterprise,  of  which  incorporation 
was  to  be  merely  an  incident.1 

§  129.  In  Teachout  v.  Van  Hoesen,2 — it  appeared  that 
Teachout  and  Branson  had  purchased  certain  property  used 
in  carrying  on  the  ice  business  for  the  sum  of  $14,000,  of 
which  $5,000  was  paid  in  cash,  and  the  balance  was  to  be 
paid  by  notes  secured  by  a  mortgage.  Shortly  afterward, 
Teachout  invited  Van  Hoesen  to  join  them  in  a  partnership 
to  acquire  the  property  and  carry  on  the  business ;  he  told 
Van  Hoesen  that  he  could  have  an  interest  at  cost,  and 
that  the  property  had  cost  $20,000,  of  which  $11,000  had 
been  paid  in  cash,  the  deferred  payment  of  $9,000  to  be 
secured  by  a  mortgage  on  the  property.  Van  Hoesen  agreed 
to  invest  $1,500,  on  the  terms  stated,  with  the  privilege  of 
increasing  his  interest  to  one-third,  making  the  interest  of 
each  of  the  three  parties  equal.  Subsequently,  Teachout 
proposed  to  Van  Hoesen  that  the  parties  in  interest  should 
form  a  corporation  instead  of  a  partnership,  the  property  to 
be  turned  in  to  the  corporation  on  the  same  basis  that  it  was 
to  have  been  turned  in  to  the  partnership,  that  is,  at  cost. 
The  corporation  was  organized  with  a  capital  stock  divided 
into  300  shares  of  the  par  value  of  $100  each.  One  hun- 
dred shares  were  issued  to  Branson  and  the  same  number 

1  See  also  Getty  v.  Devlin,  supra,  where  the  defendants  were  com- 
pelled to  share  secret  profits  with  their  associates,  but  the  Court  said 
that  an  action  for  damages  might  have  been  maintained. 

a  76  Iowa,  113. 


LIABILITY   OF   PROMOTEKS   TO   SHAREHOLDERS.          139 

to  Teachout  and  the  property  was  conveyed  by  them  to 
the  corporation  which  bound  itself  to  meet  the  deferred 
payment  of  $9,000.  Fifteen  shares  were  issued  to  Van 
Hoesen  on  payment  by  him  of  $1,500  in  money.  Van 
Hoesen  subsequently,  in  accordance  with  his  option  by 
which  he  had  the  right  to  increase  his  subscription  so 
that  he  might  have  an  equal  interest  with  Branson  and 
Teachout,  paid  in  the  further  sum  of  $4,000.  He  was 
induced  to  pay  in  the  sum  of  $5,500  in  all,  in  the  belief 
that  Branson  and  Teachout  had  each  paid  out  that  sum 
in  the  original  purchase  of  the  property  in  question,  when, 
in  truth  and  fact,  they  had  paid  but  $5,000  in  the  aggre- 
gate. The  result  was  that  Branson  and  Teachout  each 
obtained  a  one-third  interest  in  the  corporation  by  the  pay- 
merit  of  $2,500  each,  and  Van  Hoesen  paid  for  his  one-third 
interest  $5,500,  although  the  invitation  extended  to  and  ac- 
cepted by  him  was  to  join  his  associates  in  the  enterprise 
on  terms  of  equality.  It  was  held  that  he  was  entitled  to 
recover  damages  from  Teachout.  The  Court  said  :  "  It  is 
to  be  remembered  that  the  fraud  complained  of  had  its 
inception  before  the  corporation  was  organized.  It  was  a 
personal  transaction  between  individuals.  In  making  the 
representations  complained  of,  the  plaintiff  was  not  acting 
as  the  agent  of  the  corporation,  but  for  the  promotion  of 
his  own  interest,  and  it  seems  that  the  reparation  for  the 
wrong  done  should  be  made  by  the  wrong-doer  to  the 
person  upon  whom  the  injury  was  inflicted.1 

1  See  also  Paddock  v.  Fletcher,  42  Vt.  389  ;  Cheney  v.  Gleason,  125 
Mass.  166. 


140        PROMOTERS   AND   PROMOTION  OF  CORPORATIONS. 


ARTICLE  III.  —  PROMOTERS'  LIABILITY  IN  DAMAGES  WHEN  NOT  IN 
A  FIDUCIARY  POSITION  TOWARD  SHAREHOLDERS. 


130.  Promoters  ordinarily  not  in 

fiduciary  position  toward 
subscribers  for  shares. 

131.  When  action  will  lie  in  favor  of 

subscribers  against  promo- 
ters for  misrepresentations. 

132.  Misrepresentation    must    be 

assertion  of  fact. 

133.  Mere  commendatory  expres- 

sions privileged. 

134.  Representation  as  to  value  in 

exceptional  circumstances 
not  privileged. 

135.  Representation    as    to   price 

paid  by  third  persons  for 
shares  or  as  to  cost  of 
company's  property  not 
privileged. 

136.  Commendatory     expressions 

in  prospectuses. 

137.  Expressions    of    opinion,   al- 

though untrue,  not  action- 
able. 

138.  Representations  as  to  the  law. 

139.  Representation  must  be  of  a 

material  fact. 

140.  Promoters  as  a  rule  not  lia- 

ble to  purchasers  of  shares 
for  misrepresentation  in 
prospectus  addressed  by 
them  to  prospective  sub- 
scribers for  shares. 

141.  But  connection  between  pro- 

moters issuing  prospectus 
and  persons  purchasing 
shares  in  reliance  upon  it 
may  be  shown. 

142.  Andrews  v.  Mockford,  1  Q.  B. 

(1896),  372. 

143.  Representation      must      be 

fraudulent  as  well  as  false. 
Facts  to  be  proved  to  es- 
tablish fraud. 

144.  False  representation  made  as 

of  one's  own  knowledge 
deemed  fraudulent. 

145.  Absence        of        reasonable 

grounds  for  belief  in  repre- 
sentation evidence  that  it 
is  fraudulent. 


§  146.  Effect  of  subsequent  discov- 
ery by  one  who  has  made 
representation  that  it  is 
untrue. 

147.  Fraud  may  be  inferred  from 

concealment  as  distin- 
guished from  non-disclos- 
ure of  material  facts. 

148.  Circumstances   under   which 

non-disclosure  of  facts  may 
make  facts  stated  false. 

149.  Omission  of   facts  from  pro- 

spectus not  ground  for 
action  of  deceit,  unless  it 
makes  facts  stated  false. 

150.  Peek  v.  Gurney,  L.  R.,  6  H. 

L.  377. 

151.  Statement  of  portion  of  truth 

with  suggestions  and  infer- 
ences rendered  credible 
only  by  suppression  of 
other  portions  of  truth. 

152.  Rules  as  to  misrepresentation 

and  non-disclosure  not  the 
same  in  actions  ex-delicto 
as  in  suits  for  equitable 
relief. 

153.  No  legislation  in  this  country 

requiring  promoters'  agree- 
ments to  be  disclosed  in 
prospectuses. 

154.  English  statute  on  subject. 

155.  Right  of  subscriber  to  rely  on 

representations  addressed 
to  him. 

156.  Liability  of  promoters  on  sale 

of  shares  issued  to  them  at 
discount  or  in  payment  for 
property  at  overvaluation. 

157.  Liability    of   promoters    for 

misrepresentations  made 
by  co-promoters. 

158.  Conflicting  views  as  to  meas- 

ure of  damages. 

159.  Rule  in   Massachusetts   and 

other  jurisdictions. 

160.  Rule  in  New  Jersey. 

161.  Rule  laid  down  in  England 

and  by  Supreme  Court  of 
United  States. 


LIABILITY  OF  PKOMOTERS   TO   SHAEEHOLDEKS.          141 

§  130.  Promoters  ordinarily  not  in  fiduciary  position  toward 
subscribers  for  shares.  —  Promoters  do  not  put  themselves 
in  a  fiduciary  position  toward  intending  subscribers  for 
shares  by  the  mere  act  of  issuing  prospectuses,  or  inviting 
or  negotiating  for  subscriptions,  in  behalf  of  the  projected 
corporation.  Their  position  in  this  respect  does  not  differ 
from  that  of  the  parties  in  the  ordinary  case  of  an  adver- 
tisement of  goods  or  chattels  for  sale.  Exceptional  facts 
must  appear  to  establish  a  fiduciary  relation.  Ordinarily, 
then,  this  relation  does  not  subsist  between  promoters  and 
subscribers  for  shares.1  This  brings  us  to  a  consideration 
of  the  subject  of  the  liability  of  promoters,  ex  delicto,  to 
subscribers  for  shares,  when  there  is  no  relation  of  trust 
and  confidence  between  the  parties. 

§  131.  When  action  •will  lie  in  favor  of  subscribers  against 
promoters  for  misrepresentations.  —  An  action  for  damages 
will  lie  against  promoters  of  a  corporation  in  favor  of 
persons  who  have  been  induced  by  misrepresentations  made 
by  the  promoters  to  subscribe  for  shares  of  the  capital  stock 
of  the  corporation,  provided  the  misrepresentation  com- 
plained of  is  an  assertion  of  a  material  fact,  is  fraudulent, 
is  actually  or  constructively  addressed  to  the  subscriber, 
and  the  subscriber  has  been  deceived  and  damnified  thereby. 

§  132.  Misrepresentation  must  be  assertion  of  fact.  —  The 
misrepresentation  must  be  an  assertion  of  a  fact  as  dis- 
tinguished from  an  expression  of  opinion.  If  it  is  stated 

1  Derry  v.  Peek,  14  App.  Cas.  337;  Peek  v.  Gurney,  L.  R.  6  H.  L. 
377;  Arkwrightv.  Newbold,  17  Ch.  D.  301;  Dwight  on  Law  of  Per- 
sons and  Personal  Property,  393;  Coil  v.  Pittsburgh  Female  College, 
40  Penn.  439.  "  It  is  not  believed  that  the  American  adjudications 
require  in  such  contracts  any  greater  degree  of  good  faith  than  is 
exacted  of  parties  in  regard  to  other  contracts."  Lawson  on  Contracts, 
Sect.  220.  "  In  all  contracts  of  buying  and  selling,  the  maxim  is, 
Caveat  emptor ;  and  contracts  to  take  shares  are  apparently  governed 
rather  by  this  principle  than  by  any  other."  Lindley  on  Law  of 
Companies,  5th  ed.  70. 


142        PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

that  a  gold  mine  has  produced  so  much  gold,  that  is  a 
representation  of  a  fact ;  if  it  is  stated  that  it  will  yield 
such  an  amount  of  gold,  that  is  an  expression  of  an  opinion. 
A  representation  of  one's  existing  intention  is  a  statement 
of  a  fact  which  may  be  material.1  Thus,  in  Edgington  v. 
Fitzmaurice?  the  directors  of  a  corporation  issued  a  pro- 
spectus inviting  subscriptions  for  shares,  and  stating  that 
their  intention  was  to  apply  the  moneys  received  in  improv- 
ing the  property  of  the  corporation,  and  in  extending  its 
business.  In  fact,  the  moneys  were  wanted  to  meet  press- 
ing obligations.  In  an  action  for  deceit  brought  against 
the  directors  by  a  subscriber,  it  was  held  that  the  misstate- 
ment  of  intention  was  a  misstatement  of  an  existing  fact. 
"  The  state  of  a  man's  mind,"  said  Bowen,  L.  J.,  "  is  as 
much  a  fact  as  the  state  of  his  digestion."  Yet  if  an  exist- 
ing intention  is  truly  stated,  its  character  is  not  altered  by 
a  subsequent  departure  from  it.  An  intention  may  be 
changed  without  responsibility,  unless  there  has  been  a 
contract  not  to  change  it.3  A  promise  is  a  statement  as  to 
one's  intention.  If  a  person  makes  a  promise,  not  intend- 
ing at  the  time  to  fulfil  it,  it  is  a  misrepresentation  of  an 
existing  fact.4 

§  133.  Mere  commendatory  expressions  privileged. —  Praise 
of  what  one  has  to  sell,  by  false  statements  as  to  value, 
quality,  or  characteristics,  is  not  ordinarily  ground  for  an 
action  for  deceit.6  Statements  of  this  nature  afford  to  the 

1  Bryant  v.  Ocean  Ins.  Co.,  22  Pick,  at  p.  203.         2  29  Ch.  D.  459. 
8  Grayv.  Suspension  Car  Truck  Mfg.  Co.,  127  111.  187;  Long  v. 
Woodman,  58  Me.  49 ;  Jordan  v.  Money,  5  H.  L.  Cas.  185. 

4  Goodwin  v.  Home,  60  N.  H.  485;    1  Bigelow  on  Fraud,  484. 
Contra:  Dawev.  Morris,  149  Mass.  188. 

5  Dimmock  v.    Hallett,  L.  R.    2  Ch.    21;    Gordon   v.    Parmelee,  2 
Allen,  212  ;    Veazey  v.  Doten,  3  Allen,  380 ;  Deming  v.  Darling,  148 
Mass.  504;  Ellis  v.  Andrews,  56  N.  Y.   83;  Holbrook  v.  Connor,  60 
Me.   578;    Suessenguth  v.   Bingenheimer,  40  Wise.    370;   Anderson  v. 
Hill,  12  Smedes  &  M.  679;    Vawter  v.  Ohio,  etc.,  R.  R.  Co.,  14  Ind. 


LIABILITY  OF  PROMOTERS   TO   SHAREHOLDERS.  143 

person  to  whom  they  are  addressed  no  excuse  for  omitting 
to  examine,  or  to  make  an  investigation  as  to  the  thing 
commended,  although  it  is  at  a  distance,  and  is  not  seen  by 
him  ; 1  for  "  it  has  always  been  understood  the  world  over 
that  such  statements  are  to  be  distrusted."  2  "  They  are 
such  as  the  law,  in  deference  to  the  universal  habit  and 
practice  of  mankind,  permits  men  to  make  in  commending 
property  offered  for  sale,  and  as  to  which  the  buyer  (unless 
there  be  peculiar  relations  of  trust  and  confidence  between 
him  and  the  seller)  must  rely  upon  his  own  judgment."  3 
They  are  looked  upon  as  expressions  of  opinion.  Thus,  it 
has  been  said  of  a  statement  as  to  the  value  of  land,  that 
the  persons  to  whom  the  statement  was  addressed  must 
have  known  that  it  was  "  a  mere  matter  of  opinion  upon  a 
subject  upon  which  absolute  knowledge  could  not  be  ex- 
pected. In  most  cases  it  would  be  impossible  to  prove 
that  one  was  knowingly  and  wilfully  false  in  giving  such 
an  opinion,  and  that  is  one  of  the  reasons  for  refusing  to 
enter  upon  inquiries  of  this  kind.  ...  It  would  be  unjust 
to  convict  one  of  fraud  on  a  mere  expression  of  opinion, 
upon  any  evidence  which  can  ordinarily  be  introduced,  and 
for  that  reason,  as  well  as  because  common  prudence  for- 
bids implicit  reliance  upon  such  expressions,  we  have  the 
general  rule  that  false  statements  of  opinion  are  not 
actionable." 4 

§  134.    Representation  as  to  value  in  exceptional  circum- 
stances not  privileged.  —  Still,  a  representation  of  value  may 

174;  Schramm  v.  O'Connor,  98  111.  539;  Wise  v.  Fuller,  29  N.  J.  Eq. 
262 ;  Shanks  v.  Whitney,  66  Vt.  405  ;  Union  Nat.  Bank  v.  Hunt,  76 
Mo.  439;  Doran  v.  Eaton,  40  Minn.  35. 

1  Parker  v.  Moulton,  114  Mass.  99. 

2  Metcalf,  J.,  in  Brown  v.  Castles,  11  Cush.  at  p.  350. 
8  Gilfillan,  Ch.  J.,  in  Doran  v.  Eaton,  40  Minn.  35. 

4  Knowlton,  J.,  in  Nash  v.  Minnesota  Title  Ins.  §•  Trust  Co.,  159 
Mass,  at  p.  441. 


144   PKOMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

go  beyond  opinion  into  fact.1  Again,  if  a  person  making  a 
representation  of  the  nature  stated  falsely  and  fraudulently 
holds  himself  out  and  is  relied  upon  as  an  expert,2  or 
fraudulently  induces  the  person  with  whom  he  is  dealing 
to  forbear  inquiries  which  he  otherwise  would  have  made,3 
or  if  the  representation  relates  to  a  matter  peculiarly  within 
the  knowledge  of  the  person  making  it,4  then  there  is  no 
exemption  from  liability  on  the  ground  that  the  represen- 
tation is  in  the  nature  of  "  dealers'  talk,"  or  an  expression 
of  opinion.  There  is  some  conflict  of  authority  on  the 
question  whether  a  statement  as  to  cost  is  to  be  treated  as 
«  dealers'  talk."  6 

§  135.  Representation  as  to  price  paid  by  third  persons  for 
shares,  or  as  to  cost  of  company's  property,  not  privileged.  — 
But  it  is  obvious  that  a  representation  to  an  intended  sub- 
scriber as  to  the  price  paid  by  other  subscribers  for  shares 
in  a  corporation,6  or  as  to  the  price  paid  by  the  corporation 
for  property,  is  not  privileged.  The  one  is  a  representation 
in  relation  to  the  amount  of  the  corporation's  capital ;  the 
other  a  representation  as  to  the  application  of  its  capital.7 

§  136.  Commendatory  expressions  in  prospectuses.  —  The 
rule  stated  as  to  commendatory  expressions  applies  to 

1  Bishop  on  Non-Contract  Law,  Sect.  327  ;  King  v.  Sioux  City  Loan 
If  Inv.  Co.,  76  Iowa,  11. 

2  Kost  v.  Bender,  25  Mich.  515. 

8  Parker  v.  Moulton,  114  Mass.  99. 

4  Bloomer  v.  Gray,  10Ind.«App.  326 ;  Stewart  v.  Stearns,  63  N.  H.  99. 

6  Treated  as  trade  or  dealers'  talk, — Medbury  v.  Watson,  6  Met. 
246;  Manning  v.  Albee,  11  Allen,  520;  Holbrook  v.  Connor,  60  Me. 
578.  Contra,  —  Van  Epps  v.  Harrison,  5  Hill,  63;  Ives  v.  Carter,  24 
Conn.  392;  McFadden  v.  Robinson,  35  Tnd.  24;  Somers  v.  Richards, 
46  Vt.  170;  McAleer  v.  Horsey,  35  Md.  439;  Fairchild  v.  McMahon, 
139  N.  Y.  290. 

6  Coolidge  v.   Goddard,  77   Me.  578;    Caswell  v.  Hunton,   87  Me. 
277  ;  Kilgore  v.  Bruce,  166  Mass.  136. 

7  Lindsay  Petroleum  Co.  v.  Hurd,  L.   R.  5  P.  C.  221 ;     Clarke  v. 
Dickson,  6  C.  B.  (N.  s.)  453. 


LIABILITY   OF   PROMOTEKS   TO   SHAREHOLDEES.  145 

statements  which  are  but  expressions  of  hope,  expectation, 
or  confidence,  and  it  is  applicable  to  prospectuses  issued 
by  promoters.  "  I  consider  that  in  such  a  document  as 
the  prospectus  of  a  company,"  said  Turner,  L.  J.,  "  allow- 
ance must  be  made  for  some  latitude  of  statement."  l  Lord 
Romilly  said :  "  Anybody  who  looks  at  a  prospectus  under- 
stands that  the  thing  is  colored  in  this  sense,  that  every- 
thing is  put  forward  in  the  most  favorable  view  it  can  be."  2 
And  Lord  Chelmsford  said :  "  Some  allowance  must  always 
be  made  for  the  sanguine  expectations  of  the  promoters  of 
the  adventure,  and  no  prudent  man  will  accept  the  pros- 
pects which  are  always  held  out  by  the  originators  of 
any  new  scheme,  without  considerable  abatement.  But  al- 
though on  its  introduction  to  the  public,  some  high  coloring 
and  even  exaggeration  in  the  description  of  the  advantages 
which  are  likely  to  be  enjoyed  by  the  subscribers  to  an 
undertaking  may  be  expected,  yet  no  misstatement  or  con- 
cealment ought  to  be  permitted."  3  It  must  be  borne  in 
mind,  however,  that  "  you  may  use  language  in  such  a  way 
as,  although  in  the  form  of  hope  and  expectation,  it  may 
become  a  representation  as  to  existing  facts,  and  if  it  is  so, 
and  it  is  brought  to  your  knowledge  that  these  facts  are 
false,  it  is  a  fraud."  4  If  the  language  used  in  a  prospectus 
is  ambiguous,  the  burden  is  on  the  complaining  subscriber 
to  prove  that  he  understood  it  in  the  sense  in  which  it  was 
untrue.  If  the  defendants,  said  Lord  Blackburn  in  Smith 

1  Central  Ry.  Co.  of  Venezuela  v.  Kisch,  34  L.  J.  Ch.  at  p.  552. 

2  Denton  v.  MacNeil,  2  Eq.  355. 

8  Central  Ry.  Company  of  Venezuela  v.  Kisch,  L.  R.  2  H.  L.  113. 

" '  We  agreed,  however,'  Pen  said,  laughing,  '  that  because  the 
prospectus  was  rather  declamatory  and  poetical,  and  the  giant  was 
painted  on  the  show-board  rather  larger  than  the  original,  who  was 
inside  the  caravan,  we  need  not  be  too  scrupulous  about  the  trifling 
inaccuracy.'"  (Thackeray's  Pendennis.) 

4  Lord  Halsbury  in  Aaron's  Reefs  v.  Turin,  A.  C.  (1896)  273.  For 
the  facts  in  this  case,  see  Sect.  151. 

10 


146       PROMOTERS  AND   PROMOTION   OF  CORPORATIONS. 

v.  ChadwicJc,1  with  intent  to  lead  the  plaintiff  to  act  upon 
it,  "  put  forth  a  statement  which  they  know  may  have  two 
meanings,  one  of  which  is  false  to  their  knowledge,  and 
thereby  the  plaintiff  putting  that  meaning  upon  it  is  mis- 
led, I  do  not  think  they  can  escape  by  saying  he  ought  to 
have  put  the  other.  If  they  palter  with  him  in  a  double 
sense,  it  may  be  that  they  lie  like  truth,  but  I  think  they 
lie,  and  it  is  a  fraud.  Indeed,  as  a  question  of  casuistry, 
I  am  inclined  to  think  the  fraud  is  aggravated  by  a  shabby 
attempt  to  get  the  benefit  of  the  fraud,  without  incurring 
the  responsibility." 

§  137.  Expressions  of  opinion  although  untrue,  not  action- 
able. —  A  statement  in  the  nature  of  an  expression  of  opin- 
ion, although  untrue,  will  not,  as  a  rule,  ground  an  action  for 
deceit.  The  person  to  whom  it  is  addressed  is  bound  to  exer- 
cise his  own  judgment,  and  it  is  his  own  fault  if  he  allows 
himself  to  be  misled  by  the  opinion  of  another.  The  follow- 
ing untrue  representations,  held  to  be  of  opinion  and  not  of 
fact,  will  serve  to  illustrate  the  rule :  That  the  rents  of  cer- 
tain real  estate  to  be  acquired  by  a  corporation  would  pay 
six  per  cent  on  the  capital  stock  of  the  corporation  the  first 
year.2  That  the  probable  expense  of  certain  improvements 
would  be  a  sum  stated.3  That  a  specified  tract  of  land  con- 
tained large  deposits  of  oil,  it  being  known  to  both  parties 
that  the  land  had  not  been  tested ; 4  it  would  have  been 
otherwise  if  the  land  had  been  tested  to  the  knowledge  of 
the  vendor.5  While  statements  as  to  value  are,  as  has  been 
pointed  out,  ordinarily  regarded  as  expressions  of  opinion, 

1  Smith  v.  Chadwick,  9  App.  Cas.  187.    See  Yeates  v.  Prior,  6  Eng. 
(Ark.)  58. 

2  Hughes  v.  Antietam  Mfg.  Co.,  34  Md.  316. 

z  Grossman  v.  Penrose  Ferry  Bridge  Co.,  26  Penn.  69. 
*  Holbrook  v.  Connor,  60  Me.  578. 

6  Fisher  v.  Worrall,  5  W.  &  S.  483;  Higgins  v.  Grouse,  147 
N.  Y.  411. 


LIABILITY   OF  PROMOTERS   TO   SHAREHOLDERS.          147 

it  is  otherwise  in  the  case  of  statements  of  facts  which  go 
to  make  up  value,  —  as,  for  example,  statements  in  relation 
to  the  pecuniary  condition  of  a  corporation,  made  to  induce 
subscriptions  to  its  stock.1 

§  138.  Representations  as  to  the  law.  —  A  representation 
concerning  the  law  is  taken  to  be  the  expression  of  an  opin- 
ion, and  not  the  statement  of  a  fact.  The  nature  of  such 
a  representation  has  been  explained  with  great  clearness  as 
follows :  — 

"  A  representation  in  law  is  this  :  When  you  state  the 
facts,  and  state  a  conclusion  of  law,  so  as  to  distinguish 
between  facts  and  law,  a  man  who  knows  the  facts  is  taken 
to  know  the  law ;  but  when  you  state  that  as  a  fact  which 
no  doubt  involves,  as  most  facts  do,  a  conclusion  of  law, 
that  is  still  a  statement  of  fact  and  not  a  statement  of  law. 
Suppose  a  man  is  asked  by  a  tradesman  whether  he  can 
give  credit  to  a  lady,  and  the  answer  is  '  You  may ;  she  is 
a  single  woman  of  large  fortune.'  It  turns  out  that  the 
man  who  gave  the  answer  knew  that  the  lady  had  gone 
through  a  ceremony  of  marriage  with  a  man  who  was 
believed  to  be  a  married  man,  and  that  she  had  been 
advised  that  that  marriage  ceremony  was  null  and  void, 
though  it  had  not  been  declared  so  by  any  court,  and  it 
afterwards  turned  out  that  they  were  all  mistaken,  that 
the  first  marriage  of  the  man  was  void,  so  that  the  lady 
was  married.  He  does  not  tell  the  tradesman  all  these 
facts,  but  states  that  she  is  single.  That  is  a  statement 
of  fact.  If  he  had  told  him  the  whole  story  and  all 
the  facts,  and  said, '  Now  you  see  the  lady  is  single,'  that 
would  have  been  a  misrepresentation  of  law."2 

1  Bigelow's  Elements  of  Law  of  Torts,  .15 ;  Campbell  v.  Fleming, 
1  Adol.  &  El.  40;  Bedford  v.  Bagshaw,  4  Hurl.  &  N.  538;  Bradley  v. 
Poole,  98  Mass.  169. 

2  Jessel,  M.    R.,  in  Eaglesfield  V.Londonderry,   4   Ch.    D.    693; 
Upton  v.  Tribilock,  91  U.  S.  45;    Jaggar  v.    Winslow,  30  Minn.  263; 


148   PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

But  a  misrepresentation  as  to  the  law  of  a  foreign  country 
is  a  misstatemeut  of  fact.1 

§  139.  Representation  must  be  of  a  material  fact  —  The 
representation  must  be  of  a  material  fact.2  It  has  been  said 
that  no  better  rule  can  be  given  for  deciding  this  question 
than  this :  "  If  the  fraud  be  such  that,  had  it  not  been 
practised,  the  contract  could  not  have  been  made  or  the 
transaction  completed,  then  it  is  material  to  it ;  but  if  it  be 
shown  or  made  probable  that  the  same  thing  would  have 
been  done  in  the  same  way  if  the  fraud  had  not  been  prac- 
tised, it  cannot  be  deemed  material."  3  The  materiality  of 
the  representation  is  a  question  of  law  for  the  Court.4 

Thompsons.  Phoenix  Insurance  Co.,  75  Me.  55;  ^Etna  Insurance  Co. 
v.  Reed,  33  Ohio  St.  293;  People  v.  Central  Pacific  R.  R.  Co.,  27  Cal. 
655;  Fish  v.  Cleland,  33  111.  238;  Davis  v.  Betz,  66  Ala.  206.  It  is 
said  in  Pollock  on  Contracts,  522,  that  the  rule  "  probably  does  not 
apply  to  a  deliberately  fraudulent  misstatement  of  the  law.  The  cir- 
cumstances and  the  position  of  the  parties  may  well  be  such  as  to 
make  it  not  imprudent  or  unreasonable  for  the  person  to  whom  the 
statement  was  made  to  rely  on  the  knowledge  of  the  person  making 
it;  and  it  would  certainly  work  injustice  if  it  were  held  necessary  to 
apply  to  such  a  case  the  maxim  that  every  one  is  presumed  to  know 
the  law."  On  this  point  the  author  cites  Hirschfield  v.  London, 
Brighton  fr  South  Coast  Ry.  Co.,  2  Q.  B.  D.  1  ;  Bowen,  L.  J.,  in  West 
London  Commercial  Bank  v.  Kitson,  13  Q.  B.  D.  at  p.  363.  See  also 
Burns  v.  Lane,  138  Mass.  350;  Moreland  v.  Atchison,  19  Tex.  303; 
Stumpfv.  Stumpf,  7  Mo.  App.  272 ;  Berry  v.-  Whitney,  40  Mich.  65. 

1  Bethell  v.  Bethell,  92  Ind.  318;  Haven  v.   Foster,  9  Pick.   112  ; 
Windram  v.  French,  151  Mass.  547  ;   Upton  v.  Englehart,  3  Dill.  496. 
See  Payson  v.  Withers,  5  Biss.  (U.  S.)  269,  holding  that  a  subscriber 
for  shares  of  stock  of  a  corporation  of  a  foreign  State  is  bound  to 
know  the  law  of  that  State. 

2  Hedden  v.  Griffin,  136  Mass.  229  ;  Hall  v.  Johnson,  41  Mich.  286 ; 
Schwabocker  v.  Biddle,  99  111.  343  ;  Coles  v.  •  Kennedy,  81  Iowa,  360  ; 
Karberg's  Case,  1892,  3  Ch.  1. 

8  McAleer  v.  Horsey,  35  Md.  at  p.  452. 

4  Penn.  Mut.  Life  Ins.  Co.  v.  Crane,  134  Mass.  56 ;  Caswell  v. 
Hunton,  87  Me.  277  ;  1  Bigelow  on  Fraud,  139.  Contra,  —  McAleer 
v.  Horsey,  35  Md.  452.  See  Moore  v.  The  Explosives  Co.,  56  L.  J. 
(Q.  B.)  235. 


LIABILITY   OF   PROMOTERS   TO  SHAREHOLDERS.  149 

A  representation  may  be  of  such  a  nature  as  to  be  suscep- 
tible of  interpretation  either  as  an  expression  of  opinion  or 
as  a  statement  of  a  fact.  It  is  then  for  the  jury  to  deter- 
mine the  actual  intent.1 

§  140.  Promoters,  as  a  rule,  not  liable  to  purchasers  of  shares 
for  misrepresentation  contained  in  a  prospectus  addressed  by 
them  to  prospective  subscribers  for  shares.  —  The  representa- 
tion must  be  made  with  intent  that  it  shall  be  acted  on  by 
the  injured  party  in  the  manner  that  occasions  the  injury, 
and  the  injury  must  be  the  immediate  and  not  the  remote 
consequence  of  the  representation.2  When  promoters  issue 
a  prospectus  in  behalf  of  the  corporation,  inviting  subscrip- 
tions for  shares,  the  prospectus  ordinarily  is  addressed  to 
prospective  subscribers  and  to  induce  subscriptions  only. 
It  is  not  an  invitation  to  the  public  ultimately  to  become 
holders  of  shares.  Accordingly,  in  such  case  those  only  who 
have  been  induced  by  misrepresentations  contained  in  the 
prospectus  to  become  subscribers  can  have  a  remedy  against 
the  promoters.  The  purchaser  of  shares  in  the  market,  on 
the  faith  of  a  fraudulent  prospectus,  which  he  has  not  re- 
ceived from  those  answerable  for  it,  and  which  is  issued, 
not  for  the  purpose  of  inducing  dealing  in  the  stock,  but 
solely  to  procure  subscriptions,  cannot  by  action  upon  the 
prospectus  so  connect  himself  with  those  responsible  for  it 
as  to  render  them  liable  to  him,  as  if  it  had  been  addressed 
personally  to  him.3 

1  Morse  v.  Shaw,  124  Mass.  59;  Teague  v.  Irwin,  127  Mass.  217; 
Warner  v.  Benjamin,  89    Wise.   290.      But  compare  1  Bigelow  on 
Fraud,  141,  142;  Edgington  v.  Fitzmaurice,  29  Ch.  D.  459. 

2  Lord  Hatherly  in  Barry  v.  Croskey,  2  J.  &   H.  21 ;   Denton  v. 
Great  Northern  Ry.  Co.,  5  E.  &  B.  860. 

8  Peek  v.  Gurney,  L.  R.  6  H.  L.  377 ;  Nash  v.  Minnesota  Title  In- 
surance §•  Trust  Co.,  159  Mass,  at  p.  442. 

Judge  Thompson  in  his  Commentaries  on  the  Law  of  Corporations, 
Sects.  1471,  1472,  criticises  the  doctrine  of  Peek  v.  Gurney,  and  char- 


150        PROMOTERS  AND  PROMOTION   OF   CORPORATIONS. 

§  141.  But  connection  between  promoters  issuing  prospec- 
tus and  persons  purchasing  shares  in  reliance  upon  it  may 
be  shown.  —  Nevertheless,  a  prospectus  may  be  issued  by 
promoters  with  such  intent  and  in  such  manner  as  to  estab- 
lish a  connection  between  them  and  purchasers  of  shares  in 

acterizes  it  as  destitute  of  reason  and  opposed  to  justice  and  business 
morality.  "  Under  this  rule,"  he  says,  "  the  directors  might  get  the 
fruits  of  their  fraud,  and  escape  all  liability  by  the  simple  device  of 
colluding  with  certain  persons  to  become  the  purchasers  of  the  shares 
in  the  first  instance,  and  to  unload  them  upon  the  innocent  public  be- 
fore the  discovery  of  the  fraud."  It  is  plain  that  in  such  a  case  the 
prospectus  would  have  been  fraudulently  issued  to  lead  the  public  to 
purchase  shares  from  the  original  subscribers.  There  would  be  a 
clear  connection  between  the  persons  issuing  it,  and  persons  led  by  it 
to  purchase  shares.  The  transaction  would  not  be  within  the  rule 
laid  down  in  Peek  v.  Gurney.  The  learned  author  cites  four  cases  to 
show  that  the  rule  in  this  country  is  contrary  to  that  announced  in 
Peek  v.  Gurney,  but  they  are  all  distinguishable.  (1)  Morgan  v. 
Skiddy,  62  N.  Y.  319.  This  is  not  a  case  in  which  the  prospectus 
was  issued  to  invite  subscriptions.  All  the  stock  of  the  company  had 
been  issued  in  payment  for  a  mine  in  which  the  promoters  were  inter- 
ested, and  the  prospectus  was  issued  for  the  purpose  of  creating  a 
market  for  the  stock,  and  luring  the  public  to  buy  it.  (2)  Cross  v. 
Sackett,  2  Bosw.  617,  presents  facts  of  the  same  nature,  and  proceeds 
on  the  same  ground  as  Morgan  v.  Skiddy.  The  Court  said  :  "  We  ad- 
mit that  it  cannot  be  law  that  a  person  who  deceives  A.  by  some  in- 
strument, and  by  it  intends  to  deceive  only  him,  can  be  made  liable 
to  every  person  who  is  injured  from  dealing  with  A.,  by  being  misled 
by  the  instrument  which  deceived  A.,  and  was  made  to  deceive  him 
alone."  (3)  Caseaux  v.  Mali,  25  Barb.  578.  This  is  a  decision  on  a 
demurrer  to  a  declaration  which  alleged  that  the  plaintiff  purchased 
shares  of  stock  of  a  company  of  which  the  defendants  were  directors ; 
that  certain  false  representations  were  made  by  the  defendants  "for 
the  purpose  of  inducing  parties,  particularly  the  plaintiff,  to  purchase  said 
stock;  and  that  the  plaintiff  was  thereby  influenced  in  making  said 
purchase."  (4)  Bartholemew  v.  Bentley,  15  Ohio,  659.  This  is  a  de- 
cision on  a  demurrer  to  a  declaration  which  alleged  that  the  defend- 
ants, conspiring  to  cheat  and  defraud  the  public,  and  falsely  pretending 
to  have  authority  as  a  banking  corporation,  and  that  such  corporation 
had  a  suitable  capital,  issued  and  put  into  circulation  notes  and  bills 
of  the  pretended  bank  to  a  large  amount. 


LIABILITY   OF   PROMOTERS   TO   SHAREHOLDERS.  151 

the  market,  claiming  to  have  been  deceived  by  misrepresen- 
tations in  the  prospectus.  Thus  it  may  be  delivered  by  the 
promoters  to  a  person  for  the  express  purpose  of  inducing 
him  to  purchase  shares,  or  it  may  be  addressed  to  the  pub- 
lic with  a  view  to  create  a  market  for  the  shares,  and  thus, 
perhaps,  to  enable  the  promoters  to  unload  their  own  shares, 
as,  for  example,  when  it  is  circulated  after  all  the  shares 
have  been  allotted.  Under  such  conditions  persons  who 
have  been  induced  to  purchase  shares  by  false  and  fraudu- 
lent statements  in  the  prospectus,  have  their  remedy  against 
the  promoters.1 

§  142.  In  Andrews  v.  Mockford,2  —  the  jury  found  that  the 
defendants  had  conspired  to  defraud  the  public  by  promot- 
ing a  sham  mining  company ;  that  they  had  authorized  the 
issue  of  a  fraudulent  prospectus  of  the  company,  in  order 
to  induce  the  public  to  buy  shares  in  the  market,  as  well  as 
to  apply  to  the  company  for  shares  ;  that  they  had  subse- 
quently, for  the  purpose  of  creating  fictitious  prices  for 
shares,  and  to  induce  the  public  to  buy  at  such  fictitious 
prices,  caused  to  be  published  in  the  newspapers  a  false 
telegram  as  to  the  discovery  of  ore  in  the  company's  mine  ; 
and  that  on  the  strength  of  this  telegram  arid  on  the  faith  of 
the  prospectus,  the  plaintiff  had  bought  shares  in  the  mar- 
ket, and  had  suffered  loss  thereby.  On  these  findings,  it 
was  held  that  the  plaintiff  was  entitled  to  judgment.  The 
judgment  was  sustained  in  the  Court  of  Appeal,  the  Court 
saying,  through  Lord  Esher,  that  there  was  evidence  upon 
which  the  jury  might  well  come  to  the  conclusion  that  the 
defendants,  when  they  sent  out  the  prospectus,  did  not  issue 
it  merely  with  the  object  of  inviting  people  to  subscribe  to 
the  proposed  company,  but  that  they  issued  it  having  in 

1  Scott  v.  Dixon,  29  L.  J.  Ex.  62  n. ;  Gerhard  v.  Bates,  2  El.  &  Bl. 
476;  Morgan  v.  Skiddy,  62  N.  Y.  319  ;  Cross  v.  Sackett,  2  Bosw.  617. 

2  1  Q.  B.  (1896),  372. 


152         PROMOTERS  AND  PROMOTION   OF  CORPORATIONS. 

their  minds  the  intention  of  using  it  afterward  to  carry  out 
the  fraud,  and  supporting  the  prospectus  afterward  by  other 
means ;  that  they  did  subsequently  resort  to  other  means  to 
carry  out  that  original  intention  ;  that  there  had  been  one 
continuous  fraud,  beginning  with  the  prospectus  and  cul- 
minating in  the  publication  of  the  telegram,  practised  by 
the  defendants  upon  the  plaintiff  to  induce  him  to  purchase 
shares  in  the  company  in  the  market ;  and  that  the  plaintiff 
was  damaged  in  consequence  of  having  so  purchased  shares 
in  the  market. 

§  143.  Representation  must  be  fraudulent  as  well  as  false. 
Facts  to  be  proved  to  establish  fraud.  —  The  representation 
must  be  not  only  false  but  fraudulent.  Promoters  who 
issue  a  prospectus  do  not  impliedly  warrant  the  truth  of 
the  statements  contained  in  it.1  As  a  rule  they  are  not 
subject  to  a  duty,  such  as  the  law  recognizes,  to  be  careful 
in  making  representations  to  intending  subscribers  for 
shares.  The  doctrine  that  negligent  misrepresentation 
affords  a  cause  of  action  for  damages  is  confined  to  cases 
in  which  there  is  a  duty  imposed  by  law  to  be  careful.2 
In  Derry  v.  Peek,8  a  case  of  misrepresentation  in  a  pro- 
spectus, the  House  of  Lords  considered  that  the  circum- 
stances raised  no  such  duty.  If  the  misrepresentation 
was  made  with  intent  honestly  to  tell  the  truth,  and  not 
recklessly,  even  though  there  was  negligence,  ignorance, 
or  stupidity  on  the  part  of  the  person  making  it,  an  action 
for  damages  cannot  be  sustained.4  In  Derry  v.  Peek,5 

1  Lindley,  L.  J.,  in  Low  v.  Bouviere  (1891),  3  Ch.  at  p.  101. 

2  Bowen,   L.  J.,  in  Low  v.  Bouviere,   3   Ch.    (1891),   at  p.   105 
Kountze  v.  Kennedy,  147  N.  Y.  124. 

8  14  App.  Cas.  337. 

4  But  in  Hubbard  v.  Weare,  79  Iowa,  678,  it  was  held  that  the 
officers  of  a  corporation  who  invite  the  public  to  take  shares  on  the 


8  14  App.  Cas.  337. 


LIABILITY  OF   PROMOTERS   TO   SHAREHOLDERS.  153 

Lord  Herschell  said:  "I  think  the  authorities  establish 
the  following  propositions  :  First,  in  order  to  sustain  your 
action  of  deceit,  there  must  be  proof  of  fraud,  and  nothing 
short  of  that  will  suffice.  Secondly,  fraud  is  proved  when 
it  is  shown  that  a  false  representation  has  been  made,  (1) 
knowingly,  or  (2)  without  belief  in  its  truth,  or  (3)  reck- 
lessly, careless  whether  it  be  true  or  false,  Although  I 
have  treated  the  second  and  third  as  distinct  cases,  I  think 
the  third  is  but  an  instance  of  the  second,  for  one  who 
makes  a  statement  under  such  circumstances  can  have  no 
real  belief  in  the  truth  of  what  he  states.  To  prevent  a 
false  statement  being  fraudulent,  there  must,  I  think, 
always  be  an  honest  belief  in  its  truth.  And  this  prob- 
ably covers  the  whole  ground,  for  one  who  knowingly 
alleges  that  which  is  false  has  obviously  no  such  honest 
belief.  Thirdly,  if  fraud  be  proved,  the  motive  of  the 
person  guilty  of  it  is  immaterial.  It  matters  not  that 
there  was  no  intention  to  cheat  or  injure  the  person'  to 
whom  the  statement  was  made."1 

faith  of  their  representations,  will  be  presumed  to  have  known  that 
which  it  was  their  duty  to  know  ;  that  it  is  their  duty  to  use  reason- 
able diligence  to  ascertain  the  truth  of  the  facts  which  they  state ; 
and  that  they  will  be  presumed  to  possess  the  knowledge  which  the 
exercise  of  such  diligence  would  have  brought  them.  "  Outside  inves- 
tors," it  was  said,  "  can  know  but  little  of  the  affairs  of  the  corpora- 
tion, while  its  officers  may  and  should  know  them  fully." 

1  See  also  Glassier  v.  Rolls,  42  Ch.  D.  436;  Angus  v.  Clifford, 
(1891),  2  Ch.  449 ;  Le  Lievre  v.  Gould  (1893),  1  Q.  B.  491.  Follow- 
ing upon  and  in  consequence  of  the  decision  in  Derry  v.  Peek,  the 
Directors'  Liability  Act,  1890,  was  passed  in  England.  It  gives  a 
person  who  has  been  led  by  a  false  statement  in  a  prospectus  to  sub- 
scribe for  shares  in  a  company,  a  right  to  recover  damages  for  his  loss 
from  the  promoters  or  directors,  unless  they  can  prove  that  they  had 
reasonable  ground  to  believe  the  statement  and  continued  to  believe 
it  until  the  shares  were  allotted,  or  that  the  statement  was  a  fair  ac- 
count of  the  report  of  an  expert  or  a  correct  representation  of  an 
official  document. 


154       PROMOTERS  AND   PROMOTION  OF  CORPORATIONS. 

§  144.  False  representations  made  as  of  one's  own  knowl- 
edge deemed  fraudulent.  —  The  weight  of  authority  in  this 
country  supports  the  proposition  thus  stated  by  Lord 
Herschell.1  But  it  may  be  added  that  fraud  is  proved 
when  it  is  shown  that  a  false  representation  has  been 
made  "  as  of  the  party's  own  knowledge,  provided  the  thing 
stated  is  not  merely  a  matter  of  opinion,  estimate,  or 
judgment,  but  is  susceptible  of  actual  knowledge.  The 
fraud  consists  in  stating  that  the  party  knows  the  thing 
to  exist,  when  he  does  not  know  it  to  exist ;  and  if  he 
does  not  know  it  to  exist,  he  must  ordinarily  be  deemed 
to  know  that  he  does  not.  Forgetfulness  of  its  existence 
after  a  former  knowledge,  or  a  mere  belief  of  its  exist- 
ence, will  not  warrant  or  excuse  a  statement  of  actual 
knowledge." 2 

1  Nash  v.  Minnesota  Title  Insurance  Sf  Trust  Co.,  163  Mass.  578;  Id. 
159  Mass.  437  ;  Page  v.  Parker,  40  N.  H.  47;  Hammett  v.  Emerson,  27 
Me.  308 ;  Marsh  v.  Falker,  40  N.  Y.  562  ;  Chester  v.  Comstock,  40  N. 
Y.  575 ;  Kountze  v.  Kennedy,  147  N.  Y.  124 ;  Cowley  v.  Smyth,  46  N. 
J.  L.  388;  Holdom  v.  Ayer,  110  111.  448;  Avery  v.  Chapman,  62  Iowa, 
144  ;   Sollund  v.  Johnson,  27  Minn.  455;   Erie  City  Iron   Works  v. 
Barber,  106  Penn.  125;  Crown  v.  Brown,  30  Vt.  707  ;  Bartholemew  v. 
Bushnell,  20   Conn.  271 ;   Rawson  v.  Harzan,  48  Iowa,  269 ;    Union 
Pacific  Ry.  Co.  v.  Barnes,  64  Fed.  Rep.  80;  Farmers1  Stock  Breeding 
Association  v.  Scott,  53  Kan.  534;  Williams  v.  McFadden,  23  Fla.  143; 
Jackson  v.  Stockbridge,  29  Tex.  394  ;   Robertson  v.  Parks,  76  Md.  118 ; 
Taylor  v.  Leith,  26  Ohio  St.  428 ;    Bishop  on  Contracts,  Sect.  662. 
Contra.  —  Bird  v.  Kleiner,  41  Wise.  134  ;  Totten  v.  Burhans,  91  Mich. 
495 ;  Montreal  River  Lumber  Co.  v.  Milhils,  80  Wise.  540. 

2  Allen,  J.,  in  Chatham  Furnace  Co.  v.   Moffat,   147  Mass.  404; 
Kountze  v.  Kennedy,  147  N.   Y.  124;   Stone  v.  Denny,  4  Met.  151 ; 
Cooper  v.  Schlesinger,  111  U.  S.  148;  Bower  v.  Fenn,  90  Penn.  359; 
Graham  v.  Nowlin,  54  Ind.  389;  Hammett  v.  Emerson,  27  Me.  308; 
Ford  v.  McCombj  12    Bush  (Ky.),  723 ;   Mitchell  v.   Zimmerman,   4 
Tex.  75 ;  Cabot  v.  Chester,  42  Vt.  121 ;  Indianapolis,  Peru,  fr  Chicago 
Ry.  Co.  v.  Tyng,  63  N.  Y.  653;   Smith  v.  Newton,  59  Ga.  113;  Cald- 
well  v.   Henry,  76  Mo.   254;   Kilpatrick  v.   Reeves,    121  Ind.   280; 
Humphrey  v.  Merriam,  32  Minn.  197. 


LIABILITY   OF   PKOMOTERS   TO  SHAREHOLDERS.          155 

§  145.  Absence  of  reasonable  grounds  for  belief  in  repre- 
sentation evidence  that  it  was  fraudulently  made.  —  While  a 
statement  made  with  an  honest  belief  in  its  truth  cannot 
furnish  ground  for  an  action  of  deceit,  the  absence  of 
reasonable  grounds  for  belief  is  evidence  of  the  non- 
existence  of  such  belief.  And  it  has  been  observed  that 
"  if  a  man  neglects  means  of  information  which  were  at 
hand,  and  which  would  have  corrected  his  belief  in  the 
matter,  he  lays  himself  open  to  the  suggestion  that  he  took 
care  not  to  acquaint  himself  with  inconvenient  facts."  l 

§  146.  Effect  of  subsequent  discovery  by  one  who  has  made 
representation  that  it  is  untrue.  —  When  a  person  who  has 
made  a  representation,  honestly  believing  it  to  be  true, 
subsequently  and  before  the  other  party  has  acted  upon 
it,  discovers  that  it  is  not  true,  it  seems  that  he  will  be 
deemed  to  have  made  a  fraudulent  representation,  if,  hav- 
ing the  means  of  communicating  the  truth  to  the  other 
party,  he  omits  to  do  so,  and  suffers  him  to  continue  in 
error  and  to  act  on  the  belief  that  no  mistake  has  been 
made.  The  offer  to  contract  being  treated  as  a  continuing 
offer  till  revocation  or  acceptance,  the  representation  must, 
it  is  thought,  likewise  be  taken  to  be  continuously  made 
until  it  is  acted  upon  or  withdrawn.2 

§  147.  Fraud  may  be  inferred  from  concealment  as  distin- 
guished from  non-disclosure  of  material  facts.  —  A  fraudulent 
misrepresentation  may  be  implied  from  successful  efforts 
to  conceal  material  facts,  as,  for  example,  by  interposing 
obstacles  to  their  discovery,  or  by  diverting  attention  from 
them.3 

1  Anson  on  Contracts,  169. 

a  Webb's  Pollock  on  Torts,  366 ;  Reynell  v.  Sprye,  1  D.  M.  G.  660, 
709.  See  Arkwright  v.  Newbold,  17  Ch.  D.  at  pp.  325,  329. 

8  Matthews  v.  Bliss,  22  Pick.  48 ;  Kenner  v.  Harding,  85  111.  265 ; 
Croyle  v.  Moses,  90  Penn.  250 ;  Roseman  v.  C'anoran,  43  Cal.  110 ; 
Tyler  v.  Savage,  143  U.  S.  79. 


156    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

§  148.  Circumstances  under  which  non-disclosure  of  facts 
may  make  facts  stated  false.  — A  fraudulent  misrepresenta- 
tion may  under  certain  conditions  arise  from  the  intentional 
non-disclosure  of  facts.  In  the  language  of  Lord  Cairns, 
there  may  be  "  such  a  partial  and  fragmentary  statement  of 
fact  as  the  withholding  of  that  which  is  not  stated  makes 
that  which  is  stated  absolutely  false."  1  Commenting  on 
this,  Cotton,  L.  J.,  said:  "  Of  course  I  adopt  what  has  been 
said  by  Lord  Cairns,  that  the  omission  of  something  in  a 
prospectus  or  other  document  may  make  the  statement  con- 
tained in  it  false,  as,  for  instance,  if  it  contained  the  state- 
ment of  a  covenant,  and  omitted  to  state  the  fact  that  the 
covenant  had  been  released."  In  the  same  case,  James, 
L.  J.,  said :  "  Suppose  you  state  a  thing  partially,  you  may 
make  a  false  statement  as  much  as  if  you  had  misstated  it 
altogether.  Every  word  may  be  true,  but  if  you  leave  out 
something  which  qualifies  it,  you  may  make  a  false  state- 
ment. For  instance,  if  pretending  to  set  out  the  report  of 
a  surveyor,  you  set  out  two  passages  in  his  report,  and 
leave  out  a  third  passage  which  qualifies  them,  that  is  an 
actual  misstatement."  2 

§  149.  Omission  of  facts  from  prospectus  not  ground  for 
action  of  deceit,  unless  it  makes  facts  stated  false.  —  But  in 
the  case  of  representations  made  by  promoters  through  a 
prospectus  or  otherwise,  mere  omission  is  not,  if  it  does  not 
make  the  substantive  statements  false,  a  sufficient  ground 
for  maintaining  an  action  of  deceit.  This  was  expressly 
adjudged  by  the  Court  of  Appeal  in  Arkwright  v.  Newbold? 
At  the  trial  in  this  case,  Fry,  J.,  said :  "  It  appears  to  me 

1  Peek  v.  Gurney,  L.  R.  6  H.  L.  377. 

2  Arkwright  v.  Newbold,   17  Ch.  D.  320 ;  see  Miller  v.  Barber,  66 
N.  Y.  558;  Coles  v.  Kennedy,  81  Iowa,  360;  Oakes  v.  Tourquand,  L.  R. 
2  H.  L.  344 ;  Central  Ry.  Co.  of  Venezuela  v.  Kisch,  L.  R.  2  H.  L.  113. 

«  17  Ch.  D.  320.  See  also  Lawson  on  Contracts,  Sect.  220 ; 
Dwight's  Commentaries  on  Law  of  Persons  and  Personal  Property,  393. 


LIABILITY   OF   PROMOTEKS   TO   SHAREHOLDERS.  157 

to  be  well  worthy  of  consideration  whether  a  person  putting 
out  a  prospectus  does  not  undertake  to  say,  '  I  am  telling 
you  everything  which  it  is  really  material  for  you  to  know ; 
and  I  am  putting  before  you  the  whole  prospect  of  the  en- 
terprise on  which  you  are  entering.' "  He  did  not  pass  on 
this  question,  but  on  the  appeal  it  was  considered  and  de- 
cided in  the  negative. 

§  150.  In  Peek  v.  Gurney,1  —  a  bill  in  equity  was  brought 
by  a  shareholder  of  a  company  alleging  misrepresentation 
and  concealment  of  facts  in  a  prospectus  issued  by  the 
directors  of  the  company,  on  the  faith  of  which  prospectus 
the  shareholder  had  purchased  his  shares.  The  object  of 
the  bill  was  to  obtain  indemnity  from  the  directors.  The 
prospectus  stated,  among  other  things,  that  the  company 
had  been  formed  to  purchase  the  business  of  the  firm  of 
Overend,  Gurney  &  Co.,  the  consideration  for  the  good-will 
to  be  £500,000  payable  one-half  in  cash,  and  the  remainder 
in  shares  of  the  company.  As  a  fact,  the  firm  was  insol- 
vent to  the  extent  of  ,£3,000,000,  and  the  good-will  of  the 
business  was  worthless,  but  this  was  not  disclosed  by  the 
directors.  It  was  held  on  the  evidence  that  "  there  was, 
beyond  the  passive  concealment  of  the  state  of  affairs  of 
the  old  firm,  an  active  misrepresentation  of  the  truth  by 
the  respondents  for  which  they  were  answerable."  But 
the  question  of  the  effect  of  the  passive  concealment  or  non- 
disclosure was  also  dealt  with.  Lord  Chelmsford  said : 

"  That  there  was  a  moral  obligation  upon  the  respond- 
ents not  to  put  forward  a  scheme  which  depended  for  its 
success  upon  keeping  the  public  in  ignorance  of  what  ought 
in  fairness  to  be  made  known  to  them,  no  one  can  doubt. 
...  As  this  was  an  experiment  which  was  to  be  made  with 
the  money  of  other  persons  as  well  as  their  own,  they  were 
bound  to  give  all  those  other  persons  such  information  as  they 

1  L.  R.  6  H.  L.  377. 


158    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

themselves  possessed,  to  enable  a  competent  judgment  to  be 
formed  as  to  the  prudence  of  joining  the  proposed  company. 
The  question,  however,  is  not  as  to  the  moral  obligation  of 
the  respondents,  but  whether  their  intentional  concealment, 
from  whatever  motive,  of  a  fact  so  material  that  if  it  had 
been  made  known  no  company  could  have  been  formed., 
renders  them  liable  to  an  action  for  damages,  or  to  the 
analogous  proceeding  in  equity,  by  the  appellant,  who  was 
led  by  it  to  purchase  shares  in  the  company,  by  which 
he  has  been  subjected  to  a  most  serious  loss.  This  case  is 
entirely  different  from  suits  instituted  to  be  relieved  from, 
or  for  the  enforcement  of,  contracts  induced  by  the  fraudu- 
lent concealment  of  facts  which  ought  to  have  been  dis- 
closed. ...  It  is  a  suit  instituted  to  recover  damages  from 
the  respondents  for  the  injury  the  appellant  has  sustained 
by  having  been  deceived  and  misled  by  their  misrepresenta- 
tions and  suppression  of  facts  to  become  a  shareholder  in 
the  proposed  company  of  which  they  were  the  promoters. 
It  is  precisely  analogous  to  the  common-law  action  for 
deceit.  There  can  be  no  doubt  that  equity  exercises  a  con- 
current jurisdiction  in  cases  of  this  description,  and  the 
same  principles  applicable  to  them  must  prevail  both  in 
law  and  in  equity.  I  am  not  aware  of  any  case  in  which  an 
action  at  law  has  been  maintained  against  a  person  for 
an  alleged  deceit  charging  merely  a  concealment  of  a  mate- 
rial fact  which  he  was  morally  but  not  legally  bound  to 
disclose." 

Lord  Cairns  said  :  "  I  entirely  agree  with  what  has  been 
stated  by  my  noble  and  learned  friends  before  me,  that 
mere  silence  could  not,  in  my  opinion,  be  a  sufficient  foun- 
dation for  this  proceeding.  Mere  non-disclosure  of  material 
facts,  however  morally  censurable,  however  that  non-dis- 
closure might  be  a  ground  in  a  proper  proceeding  at  a 
proper  time  for  setting  aside  an  allotment  or  a  purchase  of 


LIABILITY  OF   PROMOTERS  TO   SHAREHOLDERS.  159 

shares,  would  in  my  opinion  form  no  ground  for  an  action 
in  the  nature  of  an  action  for  misrepresentation.  There 
must,  in  my  opinion,  be  some  active  misstatement  of  fact, 
or  at  all  events  such  a  partial  and  fragmentary  statement  of 
facts  as  that  the  withholding  of  that  which  is  not  stated 
makes  that  which  is  stated  absolutely  false." 1 

§  151.    Statement  of  portion  of  truth  with  suggestions  and 
inferences   rendered    credible   only   by   suppression    of    other 

portions  of  truth.  —  But  the  statement  of  a  portion  of  the 
truth,  accompanied  by  suggestions  and  inferences  which 
would  be  plausible  and  credible  if  it  contained  the  whole 
truth,  but  becomes  neither  plausible  nor  credible  whenever 
the  whole  truth  is  divulged,  is  a  false  statement.2  If  by  a 
number  of  statements  you  intentionally  give  a  false  impres- 
sion and  induce  a  person  to  act  upon  it,  it  is  not  the  less 
false,  although  if  one  takes  each  statement  by  itself  there 
may  be  difficulty  in  showing  that  every  specific  state- 
ment is  untrue.3  Thus  the  promoters  of  a  company  issued 
a  prospectus  representing  in  substance  that  a  mine  ac- 
quired by  the  company  had  already  been  proved  to  be  rich 
in  gold,  and  only  required  the  erection  of  machinery  (ten- 
ders for  which  were  about  to  be  invited),  in  order  to  be  at 
once  in  a  position  to  make  returns ;  that  it  was  proposed 
to  erect  a  forty-stamp  mill  in  the  first  instance,  and  to 
make  additions  from  time  to  time ;  that  an  average  yield 
of  one  and  one-half  ounces  per  ton  would  yield  .a  monthly 
return  of  thirty-six  hundred  ounces  of  gold  per  month  ; 

1  The  omission  from  the  prospectus  in  this  case  of  reference  to  an 
agreement  which  would  have  made  known  the  insolvency  of  the  firm 
of  Overeud,  Gurney,  &  Co.,  is  said  to  have  occasioned  the  enactment 
of  Sect.  38  of  the  Companies  Act,  1867,  which  makes  non-disclosure 
in  a  prospectus  in  certain  cases  fraudulent.     Bramwell,  L.  J.,  in  Twy- 
cross  v.  Grant,  2  C.  P.  D.  at  p.  499. 

2  Per  Lord  Watson  in  Aaron's  Reefs  v.  Twiss,  A.  C.  (1896),  273. 

8  Per  Lord  Halsbury,  in  Aaron's  Reefs  v.  Twiss,  supra ;  1  Story's 
Equity,  201 ;  Denny  v.   Oilman,  26  Me.  149. 


160   PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

the  greater  part  of  which  would  be  available  for  distri- 
bution as  dividends,  and  that  it  was  not  unreasonable  to 
anticipate  that  the  mine  would  readily  and  speedily  pay 
dividends  to  the  extent  of  one  hundred  per  cent.  The  fol- 
lowing facts  were  not  disclosed :  That  three  companies 
had  tried  to  work  the  mine  and  had  failed  ;  that  the  mine 
had  been  recently  purchased  from  one  of  these  companies 
for  £2000  and  the  assumption  of  liabilities  of  £8000  ;  that 
the  present  company  had  acquired  it  under  an  agreement  by 
which  it  was  to  pay  as  the  purchase  price  £131,000  in  stated 
instalments;  that  of  the  £10,000  which  the  subscribers 
were  asked  to  pay  on  the  shares  during  the  first  year,  none 
would  be  available  for  working  the  mine ;  and  that  there 
would  be  no  money  available  for  that  purpose  until  £38,000 
of  calls  had  been  paid.  In  truth,  the  scheme  of  the  pro- 
moters was  to  divide  among  themselves  the  money  obtained 
from  the  public  on  the  false  pretence  that  it  was  to  be  used 
to  develop  the  mine.  In  an  action  for  calls  on  shares 
brought  by  the  company  against  a  subscriber,  the  sub- 
scriber claimed  in  his  defence  that  he  was  induced  to  take 
the  shares  by  false  and  fraudulent  representations  in  the 
prospectus.  "  It  is  said,"  observed  the  Lord  Chancellor, 
"  there  is  no  specific  allegation  of  fact  which  is  proved  to 
be  false.  I  protest  against  that  being  the  true  test.  I 
should  say,  taking  the  whole  thing  together,  was  there 
false  representation  ?  I  do  not  care  by  what  means  it  is 
conveyed,  by  what  trick  or  device  or  ambiguous  language  ; 
all  these  are  expedients  by  which  fraudulent  people  seem 
to  think  they  can  escape  from  the  real  substance  of  the 
transaction.  .  .  .  When  I  look  at  the  language  in  which 
the  prospectus  is  couched,  and  see  that  it  speaks  of  a  prop- 
erty which  requires  only  the  erection  of  machinery  to  be 
either  at  once  or  shortly  in  a  condition  to  do  work  so  as  to 
obtain  all  this  valuable  metal  from  the  mine,  it  seems  to 


LIABILITY   OF   PKOMOTERS   TO   SHAEEHOLDEES.  161 

me  that  although  it  is  put  in  ambidextrous  language,  it 
means,  as  plainly  as  can  be,  that  such  is  now  the  condition 
of  the  mine,  that  such  and  such  additions  to  it  will  en- 
able it  shortly  to  produce  all  those  great  results,  and  that 
that  is  a  representation  of  an  actually  existing  fact.  ..  .  . 
You  may  use  language  in  such  a  way  as  although  in  the 
form  of  hope  and  expectation,  it  may  become  a  repre- 
sentation as  to  existing  facts,  and  if  it  is  so,  and  it  is 
brought  to  your  knowledge  that  these  facts  are  false,  it 
is  a  fraud.  .  .  ." l 

§  152.  Rules  as  to  misrepresentation  and  non-disclosure  not 
ths  same  in  actions  ex  delicto  as  in  suits  for  equitable  relief. 
—  While  misrepresentation  or  non-disclosure  of  facts  may 
be  of  such  a  nature  as  not  to  create  a  liability  ex  delicto,  it 
may  affect  the  validity  or  operation  of  a  contract  of  sub- 
scription entered  into  on  the  supposition  that  the  facts  as 
stated  are  true,  and  that  facts  not  stated  do  not  exist.  In 
equitable  suits  for  rescission  and  specific  performance,  a 
stricter  rule  prevails,  as  we  shall  hereafter  see.  It  is  im- 
portant to  bear  this  distinction  in  mind  in  considering  the 
decisions  and  dicta  in  relation  to  the  duty  of  promoters  as 
to  accurately  stating  and  fully  disclosing  all  material  facts 
in  their  knowledge  touching  the  corporate  enterprise. 

§  153.  No  legislation  in  this  country  requiring  promoters' 
agreements  to  be  disclosed  in  prospectuses.  —  In  this  country 
there  is  not,  it  is  believed,  any  legislation  requiring  pro- 
moters of  corporations  who  issue  prospectuses,  to  disclose 
prior  agreements  material  to  intending  subscribers  to  know. 
In  England,  frauds  perpetrated  by  promoters  by  means  of 
concealed  agreements  became  common,  and  were  found 
difficult  to  deal  with.  In  Twycross  v.  Grant?  Lord 
Coleridge  said  :  "  Their  non-disclosure  by  no  means  neces- 

1  Aaron's  Reefs  v.  Tvoixs,  A.  C.  (1896)  273. 

2  2  C.  P.  D.  at  p.  484. 

11 


162    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

sarily  made  a  prospectus  fraudulent ;  and,  unless  the 
prospectus  was  fraudulent,  the  deluded  shareholders  were 
generally  without  redress.  To  defeat  frauds  of  this  kind 
some  law  was  required  to  compel  the  promoters  of  com- 
panies to  disclose  all  agreements  entered  into  by  them,  and 
affecting  their  own  remuneration  by  the  company  directly  or 
indirectly,  the  price  to  be  paid  by  the  company  directly  or 
indirectly  for  the  property  the  company  was  formed  to 
take,  the  qualifications  or  independence  of  the  directors, 
the  issue  or  control  of  the  shares  of  the  company.  Experi- 
ence showed  that  it  was  by  means  of  secret  agreements 
relating  to  matters  such  as  these  that  unscrupulous  pro- 
moters succeeded  in  enriching  themselves  at  the  expense  of 
their  dupes.  In  this  state  of  things  the  38th  section  of 
30  &  31  Viet.  c.  131  was  passed." 

§  154.  English  statute  on  subject.  —  By  this  section  of  an 
act  known  as  the  Companies  Act,  1867,  it  is  provided  that 
every  prospectus  of  a  company,  and  every  notice  inviting 
persons  to  subscribe  for  shares,  shall  specify  the  dates  and 
names  of  the  parties  to  any  contract  entered  into  by  the 
company  or  by  the  promoters,  directors,  or  trustees  thereof, 
before  the  issue  of  the  prospectus,  whether  subject  to  adop- 
tion by  the  directors  of  the  company  or  not,  and  that  every 
prospectus  or  notice  not  specifying  the  same  shall  be  deemed 
fraudulent  on  the  part  of  the  promoters,  directors,  or 
officers  knowingly  issuing  the  same,  as  regards  any  person 
taking  shares  in  the  company  on  the  faith  of  the  prospec- 
tus, unless  he  had  notice  of  the  contract.  This  enactment 
does  not  affect  the  obligation  of  the  promoters  toward  the 
corporation,  but  it  imposes  a  fresh  duty  on  their  part 
toward  subscribers  for  shares,  and  gives  such  subscribers  a 
new  cause  of  action  against  the  promoter.1  The  question 

1  Lord  Blackburn  in  Erlanger  v.  New  Sombrero  Phosphate  Co.,  3 
App.  Cas.  at  p.  1269. 


LIABILITY   OF  PEOMOTERS   TO  SHAREHOLDERS.  163 

as  to  just  what  contracts  are  meant  by  this  enactment  has 
given  rise  to  considerable  difference  of  judicial  opinion. 
There  are  two  conflicting  views  :  The  one,  that  only  those 
contracts  are  meant  which  affect  the  company,  which  put 
an  obligation  on  it,  whether  with  or  without  some  benefit 
attached.1  The  other,  that  the  section  includes  every  con- 
tract made  before  the  issue  of  the  prospectus,  the  knowl- 
edge of  which  might  have  an  effect  upon  a  reasonable 
subscriber  for  shares  in  determining  him  to  give  or  with- 
hold faith  in  the  promoter,  director,  or  trustee  issuing  the 
prospectus,  and  whether  or  not  such  contract  was  made  on 
behalf  of,  or  so  as  if  adopted  to  impose  a  liability  on  the 
company.2  The  weight  of  authority  is  in  favor  of  the 
latter  interpretation.3 

§  155.  Right  of  subscriber  to  rely  upon  representations  ad- 
dressed to  him.  —  The  subscriber  has  usually  a  right  to 
rely  upon  a  representation  of  a  material  existing  fact,  the 
truth  of  which  is  not  known  to  him.  He  is  not  bound  to 
investigate,4  unless  he  has  had  actual  notice  sufficient  to 
put  him  on  his  guard.5  And  when  the  representation  is 
contained  in  a  prospectus,  he  is  not  chargeable  with  con- 
structive notice  of  the  contents  of  documents  referred  to, 
an  examination  of  which  would  show  the  falsity  of  the 
representation.6  If  the  subscriber  does  not  believe  the 

1  Bramwell,  L.  J.,  in  Twycross  v.  Grant,  2  C.  P.  D.  at  p.  499. 

2  Brett,  L.  J.,  in  Governs  Case,  1  Ch.  D.  at  p.  200. 

8  See  Cornell  v.  Hay,  L.  R.  8  C.  P.  328 ;  Gover's    Case,    1  Ch.  D. 
182;  Craig  v.  Phillips,  3  Ch.  D.  722;   Twycross  v.  Grant,  2  C.  P.  D. 
469;  Sullivan  v.  Mitcalfe,  5  C.  P.  D.  455. 

4  Central  Ry.  Co.  of  Venezuela  v.  Kisch,  L.  R.  2  H.  L.  99; 
McClellan  v.  Scott,  24  Wise.  81;  Mead  v.  Bunn,  32  N.  Y.  275. 

6  Warner  v.  Seymour,  89  Wise.  290;  Salem  Rubber  Co.  v.  Adams, 
23  Pick.  256. 

9  Central  Ry.  Co.  of  Venezuela  v.  Kisch,  supra  ;  Aaron's  Reefs  Co. 
v.  Twiss,  A.  C.  (1896)  273. 


164        PKOMOTEKS  AND   PROMOTION   OF  COEPORATIONS. 

representation,  or  acts,  not  upon  the  representation,  but 
upon  his  own  judgment  after  investigation,  there  is  no 
deceit.1  He  must  show  that  he  relied  upon  or  was  mate- 
rially influenced  by  the  false  statement,  and  that  he  was 
misled  by  it  to  his  injury ; 2  and  it  should  be  considered 
whether  he  was  likely  through  inexperience  to  be  misled 
by  the  prospectus.3  Of  course,  in  order  to  recover  he  must 
show  that  he  has  suffered  damage.4 

§  156.  Liability  of  promoters  on  sale  of  shares  issued  to 
them  at  a  discount  or  in  payment  for  property  at  overvalua- 
tion. —  It  has  been  a  not  uncommon  practice  for  promoters 
controlling  the  corporation  in  its  inception  to  cause  to  be 
issued  to  themselves  and  their  co-adventurers  shares  of  the 
capital  stock  of  the  corporation  at  a  discount  or  on  a  trans- 
fer of  property  to  the  corporation  at  a  fraudulent  over- 
valuation. The  shares  which  they  have  thus  obtained  they 
then  unload  on  the  public  before  the  bubble  bursts.  If  in 
doing  this,  they  knowingly  falsely  represent  to  purchasers 
of  the  shares  that  the  capital  of  the  corporation  has  been 
paid  in,  or  that  the  shares  are  full  paid  shares,  the  pur- 
chasers have  a  right  to  rely  on  the  representation,  and  if 
they  are  deceived  to  their  injury,  an  action  for  deceit  will 
lie  against  those  who  have  been  guilty  of  such  fraudulent 
misrepresentation.6  Beyond  this,  in  such  case,  probably 

1  Brownlow  v.  Cauthers,  40  Ind.  90 ;  Jennings  v.  Broughton,  22  L.  J. 
Ch.  585;  Haight  v.  Hayt,  19  N.  Y.  464. 

2  Smith  v.  Chadwick,  9  App.  Cas.  187;   Walker  v.  Mobile  fr  Ohio 
R.  R.  Co.,  34  Miss.  245;  Colton  v.  Stanford,  82  Cal.  351;  Bennett  v. 
Gibbons,  55  Conn.  450. 

8  Bellairs  v.  Tucker,  13  Q.  B.  D.  562. 

*  Pasley  v.  Freeman,  3  T.  R.  51 ;  Ming  v.  Woolfolk,  116  U.  S.  599 ; 
Danforth  v.  Gushing,  77  Me.  182 ;  Windram  v.  French,  151  Mass.  547. 

6  In  re  Ambrose  Lake  Tin  #•  Copper  Mining  Co.,  14  Ch.  D.  at  p.  397 ; 
Re  Gold  Co.,  11  Ch.  D.  at  p.  713;  Flagler  Engraving  Co.  v.  Flagler,  19 
Fed.  Rep.  468 ;  Priest  v.  White,  1  S.  W.  Rep.  361. 


LIABILITY  OF  PKOMOTKKS   TO   SHAEEHOLDEES.  165 

the  promoters  might  be  convicted  on  an  indictment  for 
conspiracy,1  and,  under  some  circumstances,  the  corpora- 
tion might  be  entitled  to  a  remedy  against  them.2  But 
suppose  promoters,  selling  stock  which  they  have  obtained 
in  the  manner  stated,  make  no  misrepresentations,  what 
remedy  has  the  purchaser  against  them  ?  It  has  been  held 
that  the  usual  statement  contained  in  the  certificate  of 
stock,  to  the  effect  that  the  shares  are  full  paid,  amounts 
to  a  representation  on  which  the  purchaser  has  a  right  to 
rely.3  But  this  would  not  often  be  available  in  view  of  the 
fact  that  ordinarily  the  purchaser  does  not  see  the  certifi- 
cate until  after  the  stock  has  been  bought  and  the  cer- 
tificate issued  or  transferred  to  him.4  In  order  to  recover 
he  must  prove  that  he  knew  and  relied  upon  the  represen- 
tation alleged  to  be  false  and  fraudulent.  This  question, 
however,  is  not  perhaps  of  much  practical  importance,  as 
it  is  not  easy  to  conceive  of  a  case  of  the  nature  stated  in 
which  the  promoters  could  without  some  other  fraudulent 
misrepresentation  work  off  their  shares  on  the  public.5 

§  157.  Liability  of  promoters  for  misrepresentations  made  by 
co-promoters.  —  One  is  of  course  liable  for  such  misrepresen- 
tations as  he  has  expressly  authorized  another  to  make  in 
his  behalf.  It  is  also  apparent  that,  if  persons  combine  and 
conspire  fraudulently  to  effect  a  common  object,  as,  for 
example,  to  get  up  a  bubble  company  and  by  means  of 
fraudulent  prospectuses  to  sell  shares  to  the  public,  any 

1  Bramwell,  L.  J.,  in  In  re  Gold  Co.,  11  Ch.  D.  701.     See  opinion 
of  Best,  Ch.  J.,  in  Duvergier  v.  Fellows,  5  Bing.  248. 

2  See  Chapter  II. 

8  Cross  v.  Sackett,  2  Bosw.  (N.  Y.)  617;  Windramv.  French,  151 
Mass.  547. 

4  McAleer  v.  McMurray,  58  Penn.  126. 

5  "  I  suppose  there  was  some  public  announcement  of  the  company 
as  having  a  capital  of  £100,000  paid  up,  which  was  untrue.     If  any- 
body could  prove  that  he  had  been  deceived  by  that,  he  might  be 
able  to  maintain  an  action  against  the  fraudulent  persons  who  had 


166        PROMOTERS  AND   PROMOTION   OF   CORPORATIONS. 

act  done  in  furtherance  of  the  common  object,  and  in 
accordance  with  the  general  plan,  becomes  the  act  of  all ; 
all  are  alike  responsible,  the  acts  and  words  of  one  becom- 
ing the  acts  and  words  of  all.1  But  inasmuch  as  promoters 
are  not  presumptively  partners,  one  is  not  prima  facie  lia- 
ble for  misrepresentations  made  by  another.2  Accordingly, 
to  hold  a  promoter  responsible  for  the  misrepresentations 
of  a  co-promoter,  when  the  misrepresentation  itself  was  not 
authorized,  and  there  was  no  fraudulent  combination,  it 
must  be  shown,  as  matter  of  fact,  that  the  promoter  author- 
ized his  co-promoter,  either  expressly  or  impliedly,  to  act 
as  his  agent,  and  that  the  misrepresentation  was  made 
within  the  apparent  scope  of  the  authority,  and  in  reference 
to  the  subject  matter  of  the  agency.3 

§  158.  Conflicting  views  as  to  measure  of  damages.  —  There 
appear  to  be  three  distinct  theories  as  to  the  true  measure 
of  damages  in  an  action  of  deceit  brought  by  a  person  who 
has  been  induced  by  false  and  fraudulent  representations  to 
take  and  pay  for  shares  in  a  corporation.  The  respective 
measures  under  these  theories  are  as  follows. 

§  159.  Rule  in  Massachusetts  and  other  jurisdictions. — 
First.  The  difference  between  the  value  of  the  shares  at  the 
time  of  their  purchase  and  what  the  value  would  then  have 
been  had  the  representations  been  true.4  The  objection  to 

deluded  him  and  caused  damage  to  him."  Bramwell,  L.  J.,  in  In  re 
Gold  Co.,  11  Ch.  D.  701. 

1  Page  v.  Parker,  43  N.  H.  363 ;  HornUower  v.   Crandell,   7  Mo. 
App.  220;  Aff.  78  Mo.  581.     Stiles  v.  White,  11  Met.  356;   Morehouse 
v.  Yeager,  71  N.  Y.  594.     Although  some  obtain  no  benefit  from  the 
fraud.     Walsham  v.  Stainton,  1  De  G.,  J.  &  S.  678. 

2  See  Sect.  233. 

8  Meacham  on  Agency,  Sect.  743,  and  cases  there  cited.  See  Weir 
v.  Barnett,  3  Ex.  D.  32  ;  Cargill  v.  Bower,  10  Ch.  D.  502. 

4  Hubbell  v.  Meigs,  50  N.  Y.  480;  Exchange  Bank  of  Kentucky  v. 
Gailskill  (Ky.  1896),  37  S.  W.  Rep.  160;  Warner  v.  Benjamin,  89  Wise. 
290 ;  Morse  v.  Hutchins,  102  Mass.  440 ;  1  Bigelow  on  Fraud,  628. 


LIABILITY  OF  PROMOTERS   TO   SHAREHOLDERS.          167 

this  is  that  it  permits  a  recovery  for  "  the  expected  fruits  of 
an  unrealized  speculation,"  instead  of  limiting  the  recovery 
to  the  actual,  tangible  loss.  The  action  being  for  a  tort,  and 
not  for  the  breach  of  a  contract,  the  plaintiff's  loss  is  not 
the  value  of  his  bargain,  for,  as  Mr.  Sedgwick  observes,  "  it 
is  necessary  to  the  very  maintenance  of  the  action  to  show 
that  the  bargain  would  not  have  been  made  if  the  defend- 
ant had  not  made  the  false  statements  complained  of.  If 
these  had  not  been  made,  therefore,  the  plaintiff  would 
have  the  consideration  he  paid,  but  nothing  more  ;  and  the 
difference  between  that  consideration  and  the  actual  value 
of  the  property  represents  all  the  loss  that  was  caused  by 
the  defendant's  tort."  1 

§  160.  Rule  in  New  Jersey.  —  Second.  In  case  the  shares 
have  been  purchased  to  hold  as  an  investment,  the  differ- 
ence between  the  price  paid  for  the  shares  and  their  value 
at  the  time  when  the  fraud  ceases  to  be  operative.2  If  this 
is  to  be  applied  in  all  cases  without  qualification,  it  may  put 
the  shareholder  in  a  better  position  than  if  the  false  repre- 
sentation had  in  fact  been  true,  inasmuch  as  it  eliminates 
the  risk  of  loss  or  depreciation  from  extrinsic  causes,  while 
the  shares  are  retained,  until  the  fraud  is  discovered.  The 
recovery  should  be  limited  to  loss  caused  by  defects  inhe- 
rent in  the  original  project,  and  should  not  extend  to  loss 
occasioned  by  extrinsic  causes,  such  as  mismanagement  or 
business  depression.  This  has  been  stated  and  explained 
with  great  force  and  clearness  by  Ch-ief  Justice  Cockburn, 
as  follows  :  "  If  a  man  is  induced  by  misrepresentation  to 
buy  an  article,  and,  while  it  is  still  in  his  possession,  it  be- 
comes destroyed  or  damaged,  he  can  only  recover  the  differ- 
ence between  the  value  as  represented  and  the  real  value  at 
the  time  he  bought.  He  cannot  add  to  it  any  further  dete- 

1  Sedgwick  on  Damages,  8th  ed.,  Sect.  773. 

2  Smith  v.  Duffy,  57  N.  J.  L.  679. 


168    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

rioration  which  has  arisen  from  some  other  supervening 
cause.  If  a  man  buys  a  horse,  as  a  race-horse,  on  the  false 
representation  that  it  has  won  some  great  race,  while  in 
reality  it  is  a  horse  of  very  inferior  speed,  and  he  pays 
ten  or  twenty  times  as  much  as  the  horse  is  worth,  and 
after  the  buyer  has  got  the  animal  home  it  dies  of  some 
latent  disease  inherent  in  its  system  at  the  time  he  bought, 
he  may  claim  the  entire  price  he  gave  ;  the  horse  was,  by 
reason  of  the  latent  mischief,  worthless  when  he  bought ; 
but  if  it  catches  some  disease  and  dies,  the  buyer  cannot 
claim  the  entire  value  of  the  horse,  which  he  is  no  longer  in 
a  condition  to  restore,  but  only  the  difference  between  the 
price  he  gave  and  the  real  value  at  the  time  he  bought." J 

§  161.  Rule  laid  down  in  England  and  by  Supreme  Court  of 
the  United  States.  —  Third.  The  difference  between  the 
value  of  the  shares  at  the  time  when  they  were  purchased 
and  the  price  paid,  with  interest  and  any  other  outlay 
legitimately  attributable  to  the  fraudulent  representations.2 
This  is  the  rule  adopted  by  the  Supreme  Court  of  the 
United  States.  It  is  also  the  rule  in  England.  And  it 
would  seem  to  be  the  sounder  and  more  reasonable  rule. 
While  the  value  is  to  be  ascertained  as  of  the  time  when 
the  shares  were  taken,  it  is  not  conclusively  fixed  by  what 
might  then  have  been  obtained  for  the  shares  in  the  market, 
because  the  purchaser,  having  invested,  was  not  bound  to 
sell  at  that  time.  Moreover,  the  inquiry  is  as  to  the  real 
value,  and  the  market  price  may  have  been  factitious  or  a 
mistaken  estimate  of  the  real  value.3 

1  Twycross  v.  Grant,  2  C.  P.  D.  at  p.  544. 

2  Smith  v.  Bolles,  132  U.  S.  125 ;  Twycross  v.   Grant,  2   C.   P.  D. 
514 ;  Peek  v.  Derry,  37  Ch.  D.  541  ;    Redding  v.  Godwin,  44  Minn. 
355.     In  Buschman  v.  Codd,  52  Md.  202,  the  same  rule  was  applied 
when  the  misrepresentation  related  to  a  business  sold. 

6  Peek  v.  Derry,  supra ;  Twycross  v.  Grant,  supra ;  Smith  v.  Bolles, 
supra. 


LIABILITY  OF  PKOMOTEKS   TO   SUBSCRIBERS. 


169 


CHAPTER  VIII. 


LIABILITY   OP  PROMOTERS  TO    SUBSCRIBERS   FOR   SHARES    IN   A 
PROJECTED   CORPORATION   WHICH   PROVES   ABORTIVE. 


§  162.  Promoters,  in  such  case,  may 
be  liable  to  refund  moneys 
paid  in  advance  on  shares 
by  subscribers. 

163.  No  deduction  allowed  for  ex- 

penses, unless  subscriber 
has  authorized  deposit  to 
be  applied  thereto. 

164.  What  subscriber  must  prove 

in  order  to  recover  from 
promoters. 


§  165.    Burnside  v.  Dayrell,  3  Ex. 
224. 

166.  Criticism  of  Burnside  v.  Day- 

rell. 

167.  Subscriber  has  no  lien  on 

moneys  advanced  as 
against  creditors  of  com- 
pany. 

168.  Subscriber's    remedy   is    at 

law,  unless  fraud  shown, 
or  accounting  necessary. 

169.  Apperly  v.  Page,  1  Phill.  779. 


§  162.  If  corporation  proves  abortive,  promoters  may  be  lia- 
ble to  refund  moneys  paid  in  advance  by  subscribers.  —  When 
a  subscriber  for  shares  in  a  projected  corporation  has  paid 
money  thereon  in  advance  to  the  promoters,  and  the 
scheme  proves  abortive,  he  may  recover  back  his  money. 
This  right  rests  on  the  failure  of  the  consideration  on 
which  the  money  was  paid.1  But  the  scheme  is  not  to  be 
deemed  abortive  until  the  formation  of  the  corporation  has 
been  abandoned  or  has  become  impracticable,  or  a  reason- 
able time  for  the  formation  has  elapsed.2  It  is  reasonable,  in 
the  absence  of  agreement  to  the  contrary,  that  the  expense 

1  Nockels  v.  Crosby,  3  B.  &  C.  814 ;  Walstdb  v.  Spottiswoode,  15  M.  & 
W.  501 ;  Ward  v.  Lord  Lodensborough,  12  C.  B.  254  ;  Chaplin  v.  Clark, 
4  Ex.  402  ;  Grand  Trunk  Ry.  Co.  v.  Brodie,  9  Hare,  822.     If  the  sub- 
scriber has  given  a  note,  instead  of  paying  cash,  he  may  plead  as  a  de- 
fence the  fact  that  the  company  has  proved  abortive.     Bradford  v. 
Harris,  77  Md.  153. 

2  Johnson  v.  Goslett,  3  C.  B.  (N.  s.)  at  p.  590 ;  Liudley  on  Com- 
pany's Law,  5th  ed.,  29. 


170        PROMOTERS   AND   PROMOTION  OF  CORPORATIONS. 

of  exploiting  the  proposed  undertaking  should,  in  case 
it  collapses,  fall  upon  the  original  projectors,  and  not 
on  those  who  advanced  their  money  on  the  faith  of  the 
ability  of  the  projectors  to  do  that  which  they  undertook 
to  do. 

§  163.  No  deduction  allowed  for  expenses,  unless  subscriber 
has  authorized  his  deposit  to  be  so  applied.  —  In  Nockels  V. 
Crosby?  Littledale,  J.,  said :  "  If  persons  set  a  scheme 
afoot,  and  assume  to  be  the  directors  or  managers,  all  the 
expenses  incurred  before  the  scheme  is  in  actual  operation 
must  in  the  first  instance  be  borne  by  them.  When  it  is 
in  operation,  the  expenses  and  charges  of  management 
should  be  borne  by  the  concern,  and  then  it  may  be  fair 
that  the  preliminary  expenses  should  be  paid  in  the  same 
way,  for  then  the  subscribers  have  the  benefit  of  them. 
Suppose  there  had  been  no  subscribers,  the  projectors  must 
have  paid  all  the  expenses.  If,  then,  one  person  only 
subscribes,  are  all  those  expenses  to  be  cast  upon  him  ? 
The  hardship  and  injustice  would  be  monstrous,  yet  that 
would  be  the  consequence  in  such  a  case  were  we  now  to 
hold  that  the  plaintiff  was  liable  to  a  proportion  of  the  ex- 
penses incurred  by  these  defendants." 

Accordingly,  on  recovery  of  deposits  paid  in  advance  by 
a  subscriber,  no  deduction  is  allowed  on  account  of  ex- 
penses which  the  promoters  have  incurred  in  attempting 
to  bring  about  the  formation  of  the  corporation,2  unless 
the  subscriber  has  expressly  or  impliedly  authorized  the 
expenditures.3 

1  3  B.  &  C.  814. 

2  Nockels  v.  Crosby,  3  B.   &  C.  814;  Ashpitel  v.    Sercombe,  5  Ex. 
147. 

*  Baird  v.  Ross,  2  Macq.  61;  Vanev.  Cobhold,  1  Ex.  798;  Willey 
v.  Parrott,  3  Ex.  211;  Aldhom  v.  Brown,  7  E.  &  B.  164;  2  E.  &  E. 
398;  Garwood  v.  Ede,  1  Ex.  264;  Jones  v.  Harrison,  2  Ex.  52;  West 
Point  Foundry  Association  v.  Brown,  3  Edw.  Ch.  (N.  Y.)  284. 


LIABILITY  OF  PROMOTERS   TO   SUBSCRIBERS.  171 

§  164.  "What  subscriber  must  prove  in  order  to  recover 
from  promoters. — The  subscriber,  in  order  to  recover  his 
money,  must  prove  that  he  paid  it  to  the  defendant  or  to  the 
defendant's  agent.  As  promoters  are  not,  as  such,  partners, 
the  payment  of  moneys  by  a  subscriber  to  one  of  several 
promoters  is  not  necessarily  a  payment  to  the  others,  and 
payment  into  a  bank  to  the  account  of  the  company  is  not 
a  payment  to  the  promoter  sought  to  be  held,  unless  it  is 
shown  that  he  authorized  the  bank  to  receive  the  deposit  on 
the  account  to  which  it  was  paid.  Thus  in  Watson  v.  Earl 
of  Charlemont*  the  plaintiff  sued  to  recover  deposits  paid 
by  him  on  shares  in  an  abortive  company.  The  three  de- 
fendants were  members  of  the  committee  of  management. 
The  letter  of  allotment  sent  to  the  plaintiff  was  signed  by 
the  secretary  of  the  company,  and  contained  a  list  of  banks 
into  any  of  which  deposits  might  be  paid.  The  plaintiff 
had  paid  his  deposits  into  one  of  those  banks,  and  had 
received  from  the  bankers  a  receipt  on  account  of  certain 
persons  as  trustees  for  the  company.  Only  one  of  the 
defendants  was  amongst  the  persons  on  whose  account 
the  receipt  of  the  money  was  thus  acknowledged.  It  was 
held  that  this  evidence  was  insufficient  to  show  a  receipt 
by  all  the  defendants,  and  the  action  therefore  failed. 

§  165.  In  Burnside  v.  Dayrell,2  a  subscriber  for  shares  in 
a  projected  company  paid  his  deposit  into  the  bank  named 
in  the  prospectus  which  had  been  circulated  by  the  defend- 
ant's sanction,  the  defendant's  name  appearing  therein  as 
one  of  the  provisional  committee,  and  as  chairman  of  the 
committee  of  management;  but  the  defendant  had  not 
personally  superintended  the  allotment  of  shares,  and  had 
taken  no  active  part  in  the  concern,  and  had  been  present 
once  only  at  any  meeting,  when  he  acted  in  the  capacity  of 
chairman,  but  dissented  from  the  proceedings ;  in  an  action 

1  12  Q.  B.  856.  2  3  Ex.  224. 


172    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

by  the  subscriber  against  the  defendant  for  the  recovery  of 
his  deposit  on  the  abandonment  of  the  scheme,  it  was  held 
that  the  defendant  was  not  liable.  Pollock,  C.  B.,  said  : 
"  The  defendant  can  only  be  liable  because  he  was  the 
person,  or  one  of  the  persons,  to  whom  the  deposit  was 
paid.  There  was  no  evidence  that  such  was  the  case  in 
the  present  instance.  The  defendant  never  acted  at  all, 
except  by  once  attending  a  meeting  as  chairman,  and  by 
concurring  in  the  circulation  of  the  prospectus.  .  .  .  Al- 
though the  money  was  paid  to  the  bankers  named  in  the 
prospectus,  it  was  not  paid  to  the  use  of  the  defendant,  nor 
was  there  any  proof  that  the  defendant  ever  received,  or 
could  have  received,  any  part  of  it."  1 

§  166.  Criticism  of  Burnside  v.  Dayrell.  —  The  correctness 
of  the  decision  in  this  case  may  well  be  doubted.  In  the 
earlier  cases  of  Nockels  v.  Crosly?  and  Walstab  v.  Spottis- 
woode?  the  plaintiff  proved  that  he  had  paid  his  deposits  to 
the  bankers  appointed  by  the  defendants  to  receive  them, 
and  this  was  regarded  as  sufficient.4  And  in  the  later  case 
of  Johnson  v.  Goslett?  the  defendants  having  issued  a 
prospectus  in  which  certain  bankers  were  designated  to 
whom  deposits  on  shares  might  be  paid,  it  was  held  that 
the  prospectus  was  evidence  against  the  defendants  that 
money  for  shares  might  properly  be  paid  to  the  bankers 
named  in  the  prospectus.  It  was  likewise  held  that  all 
the  defendants  were  responsible  to  the  depositors  for  the 
money  so  paid  in,  the  scheme  having  proved  abortive,  not- 
withstanding the  fact  that  the  bankers  gave  receipts  as  for 
the  company,  and  though  they  entered  the  moneys  received 

1  Drouet  v.  Taylor,  16  C.  B.  671,  is  to  the  same  effect. 

2  3  B.  &  C.  814. 

«  15  M.  &  W.  501. 

4  See  also  Hayes  v.  Stanley,  14  Ir.  Com.  Law  Rep.  277 ;  Maitland's 
Case,  4  De  G.,  M.  &  G.  769. 
6  3  C.  B.  (N.  s.)  569. 


LIABILITY  OF  PROMOTERS   TO   SUBSCRIBERS.  173 

to  an  account  in  the  name  of  some  only  of  the  defendants. 
"  That,"  it  was  said,  "  was  an  act  between  the  bankers  and 
the  defendants  subsequent  to  the  paying  in,  with  which 
those  who  had  paid  in  had  no  concern."  Burnside  v. 
Dayrell  being  cited  in  argument,  Martin,  B.,  remarked: 
"  That  case  was  decided  after  the  turning  of  the  tide  in  the 
provisional  committee  cases." 

§  167.  No  lien  by  subscribers  as  against  creditors  of  com- 
pany. —  Subscribers  who  have  paid  money  on  their  shares, 
which  has  been  deposited  to  the  credit  of  the  company, 
have  no  lien  on  such  money  as  against  creditors  of  the 
company.  Thus,  in  Moseley  v.  Cressey's  Co.?  the  promot- 
ers of  a  company  issued  a  prospectus  stating  that  deposits 
would  be  returned  if  no  allotment  of  shares  was  made. 
Several  deposits  were  made,  but  no  allotment  ever  took 
place.  The  depositors  filed  a  bill  to  restrain  creditors 
from  attaching  under  a  garnishee  order  the  deposits  which 
stood  in  a  bank  to  the  credit  of  the  company.  "  If  the 
object  had  been  to  create  a  lien  of  this  kind,"  said  Sir  W. 
Page  Wood,  Y.  C.,  "  the  obvious  way  of  doing  so  would 
have  been  to  have  said  in  the  prospectus  that  there  would 
be  a  lien  on  the  deposits  until  the  company  was  estab- 
lished, or  that  it  was  to  be  set  apart  as  a  trust  fund  in  the 
name  of  trustees,  to  be  returned  in  the  event  of  the  com- 
pany not  being  established.  Nothing  of  that  kind  was 
done ;  nor  was  that  the  contract.  The  contract  was, 
You  are  to  pay  so  much  per  share  when  you  apply  for 
shares,  and  your  deposits  will  be  returned  if  no  allotment 
is  made,  —  not  that  the  actual  thing  so  deposited  was  to  be 
paid  back ;  for  payment  to  the  company's  bankers  to  the 
account  of  the  company  made  the  moneys  ipso  facto  part 
of  the  company's  assets.  There  are  persons  to  be  consid- 
ered besides  the  depositors,  —  namely,  creditors  who  supply 

1  1  Eq.  405. 


174        PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

their  labor  and  goods  to  the  company  when  registered,  in 
the  hope  and  expectation  that  they  will  be  paid  out  of  its 
assets ;  when  they  know  there  is  a  balance  at  the  bankers, 
they  furnish  goods ;  but  if  they  understand  that  the  com- 
pany has  no  credit  at  the  bank,  they  do  not  trust  it  at  all." 
Demurrer  to  bill  allowed. 

§  168.    Subscriber's  remedy  is  at  law,  unless  fraud  shown, 

or  accounting  necessary.  —  The  remedy  to  recover  deposits 
on  shares  in  an  abortive  company  is  by  an  action  at  law,1 
and  not  by  a  suit  in  equity,  unless  in  a  case  of  fraud,  or 
when  an  accounting  is  essential.2  Thus  it  has  been  held 
that  when  promoters  issue  a  prospectus,  not  with  a  fair  in- 
tention to  establish  a  bona  fide  company,  but  as  a  snare  to 
obtain  subscriptions,  the  proposed  enterprise  being  a  "  bub- 
ble," a  mere  scheme  to  cheat,  subscribers  may  maintain  a 
bill  in  equity  to  recover  the  moneys  which  they  have  paid 
on  their  shares.3  If  the  promoters  have  received  money 
on  subscriptions  and  used  it  in  purchasing  property,  mak- 
ing a  profit  in  the  transaction,  the  profit  may  be  secured 
for  the  benefit  of  the  subscribers  on  a  bill  by  some  in 
behalf  of  all,  although  the  corporation  has  never  been 
formed ;  the  subscribers  are  not  limited  to  the  remedy 
of  suing  for  a  return  of  their  deposits.4 

§  169.  In  Apperly  v.  Page,5  a  bill  was  brought  by  sub- 
scribers against  promoters  for  an  accounting,  alleging  that 
the  promoters  had  been  expending  the  deposits  for  un- 
authorized purposes,  and  praying  that  payments  of  legiti- 

1  Denton  v.  MacNeil,  2  Eq.  352. 

2  Colt  v.  Woollaslon,  2  P.  Wms.  153;  Green  v.  Barrett,  1  Sim.  45; 
Williams  v.  Page,  24  Beav.  654 ;  Grand  Trunk  Ry.  Co.  v.  Brodie,  9 
Hare,  822  ;  Williams  v.  Salmond,  2  K.  &  J.  463. 

8  Green  v.  Barrett,  1  Sim.  45 ;  Blain  v.  Agar,  5  L.  J.  Ch.  1. 

*  Butt  v.  Monteaux,  1  Kay  &  J.  98  ;  24  L.  J.  Ch.  99. 

•  1  Phill.  779. 


LIABILITY   OF  PROMOTERS  TO   SUBSCRIBERS.  175 

mate  expenses  only  from  the  deposits  should  be  allowed, 
and  the  remainder  returned  to  the  subscribers.  In  return- 
ing deposits,  it  is  a  breach  of  trust  to  prefer  particular 
shareholders.1 

1  Williams  v.  Page,  24  Beav.  654  ;  Clements  v.  Bowes,  1  Drew,  684  ; 
21  L.  J.  Ch.  306. 


176    PEOMOTERS  AND  PROMOTION  OF  CORPORATIONS. 


CHAPTER  IX. 


REMEDIES  OP  SUBSCRIBERS  FOR  SHARES  AGAINST  CORPORA- 
TION WHEN  MISLED  BY  MISREPRESENTATIONS  MADE  BY 
PROMOTERS  OR  BY  THEIR  NON-DISCLOSURE  OF  MATERIAL 
FACTS. 

ARTICLE  I.  —  Liability  of  Corporation  in  Damages  for 
Fraudulent  Misrepresentations  made  by  Promoters. 

ARTICLE  II. — Misrepresentation  or  Non-disclosure  of 
Material  Facts  by  Promoters  as  Ground  for  Rescission  of 
Subscriptions  for  Shares,  or  as  a  Defence  to  /Suits  thereon 
by  the  Corporation. 

ARTICLE  I. — LIABILITY  OF  CORPORATION  IN  DAMAGES  FOR  FRAUD- 
ULENT MISREPRESENTATIONS  MADE  BY  PROMOTERS. 


§  170. 


Action    of    deceit    will  lie 

against  a  corporation. 
171.     Corporation   not   liable    in 
damages  for  frauds  com- 
mitted by  promoters  prior 
to  its  formation. 


§  172.  Effect  of  insolvency  of  cor- 
poration on  right  of  suit 
by  subscriber  against  it  to 
recover  damages. 


§  170.  Action  of  deceit  •will  lie  against  a  corporation.  —  It 
is  sometimes  laid  down  that  an  action  for  deceit  will  not 
lie  against  the  corporation  itself,  because  the  gist  of  the 
action  is  fraudulent  intent,  and  a  fraudulent  intent  is  not 
imputable  to  an  artificial  body.1  The  modern  doctrine, 
however,  is  otherwise.  In  Bank  of  Scotland  v.  Addie?  it 
was  said  that  an  action  for  deceit  could  not  be  maintained 

1  Thompson  on  Corporations,  Sect.  1462;  Cook  on  Stockholders, 
Sect.  157 ;  Houston  v.  R.  R.  Co.,  55  Tex.  176. 

2  L.  R.  1  Sc.  App.  145. 


REMEDIES   OF   SUBSCRIBERS.  177 

against  a  corporation  ;  but  this  was  not  necessary  to  the 
decision,  and  in  the  later  case  of  Mackay  v.  Bank  of  New 
Brunswick,1  it  was  directly  held  that  such  an  action  would 
lie.  In,  this  country  it  has  been  generally  held  that  the 
action  will  lie  against  the  corporation.2 

§  171.  Corporation  not  liable  in  damages  for  frauds  com- 
mitted by  promoters  prior  to  its  formation.  —  In  order  to 
make  the  corporation  liable  in  damages  to  subscribers  who 
have  been  led  to  take  shares  by  false  and  fraudulent  repre- 
sentations, it  must  be  shown  that  such  representations  were 
made  by  agents  of  the  corporation  acting  within  the  scope 
of  their  authority.  In  an  action  for  damages  on  the  ground 
of  fraudulent  misrepresentations,  it  is  essential  to  prove 
knowledge  by  the  defendant  or  his  agent  of  the  falsity  of 
the  statement  alleged  to  have  deceived  the  plaintiff.  As  a 
corporation  cannot  have  agents  before  it  exists,  it  follows 
that  it  is  not  liable  in  damages  for  misrepresentations  made 
by  its  promoters,  through  prospectuses,  or  otherwise,  before 
it  comes  into  existence.  Not  having  made  the  representa- 
tions itself  or  by  its  agents,  it  is  not  responsible  for  them.3 
But  the  promoters  may,  in  fact,  after  its  formation,  act  as 
its  agents  in  procuring  subscriptions  for  shares. 

§  172.  Effect  of  insolvency  of  corporation  on  right  of  suit 
by  subscriber  against  it  to  recover  damages.  —  Subscribers 
who  have  been  induced  to  take  shares  by  the  fraud  of  the 

1  5  P.  C.  394.     See  also  Houldsworth  v.  City  of  Glasgow  Bank,  5 
App.  Cas.  at  p.  327. 

2  Dorsey  Match   Co.  v.  McCaffery,  139  Ind.  545;  Nash  v.  Minnesota 
Title  Ins.  fr  Trust  Co.,  163  Mass.  574;  Bosley  v.  National  Machine  Co., 
123  N.  Y.  550,  555;  Cragie  v.  Hadley,  99  N.  Y.  131;  Erie  City  Iron 
Works  v.  Barber,  106  Penn.  125;  Fogg  v.  Griffin,  2  Allen,  1;  Peebles 
v.  Patasco  Guano  Co.,  77  N.  C.  233 ;   Cassidy  v.  Globe  Rubber  Co.,  37 
N.  J.  Eq.  175. 

8  Miller  v.  Wild  Cat  Gravel  Road  Co.,  57  Ind.  241;  Karberg's  Case 
(1892),  3  Ch.  at  p.  13;  Kennedy  v.  McKay,  43  N.  J.  L.  288  ;  Presby  v. 
Parker,  56  N.  H.  409. 

12 


178    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

agents  of  the  corporation  may  be  precluded  from  recover- 
ing damages  from  the  corporation  when  it  has  become 
insolvent.  In  Houldsworth  v.  City  of  Glasgow  Bank,1  the 
plaintiff,  who  had  taken  shares  in  the  defendant  company 
on  the  faith  of  certain  fraudulent  misrepresentations  made 
by  its  directors,  brought  an  action  against  it  for  damages. 
The  company  was  then  insolvent  and  was  being  wound  up. 
It  was  held  that  the  action  could  not  be  maintained,  the 
ground  for  the  decision  being  that  "  a  shareholder  con- 
tracts to  contribute  a  certain  amount  to  be  applied  in  pay- 
ment of  the  debts  and  liabilities  of  the  company,  and  it  is 
inconsistent  with  his  position  as  a  shareholder,  while  he 
remains  such,  to  claim  back  any  of  that  money."2  The 
doctrine  of  this  case,  it  has  been  said,  is  based  on  the 
winding-up  provisions  of  the  Companies  Act,  1862,  and 
upon  the  rights  of  creditors  under  winding-up  proceedings, 
and  has  no  application  to  companies  not  being  wound  up.3 
The  question  of  its  applicability  in  this  country  to  a  share- 
holder's action  against  an  insolvent  corporation  when  pro- 
ceedings have  been  instituted  for  a  distribution  of  the 
assets  among  the  creditors,  does  not  appear  to  have  been 
much  considered.4 

1  5  App.  Gas.  317. 

2  Per  Lindley,  L.  J.,  in  In  re  Addlestone  Linoleum  Co.,  37  Ch.  D. 
191 ;  Carling  v.  London  tf  Leeds  Bank,  56  L.  J.  Ch.  321. 

8  Lindley's  Law  of  Companies,  5th  ed.,  777. 

4  It  has  been  held  in  Indiana  that  the  shareholder  may  sue  after 
the  insolvency  of  the  corporation,  and  while  it  is  being  wound  up 
under  a  statutory  assignment.  Dorsey  Match  Co.  v.  McCaffrey,  139 
Ind.  545.  See  Sects.  191, 192. 


KEMEDIES   OF   SUBSCEIBEES. 


179 


ARTICLE  II.  —  MISREPRESENTATION  OR  NON-DISCLOSURE  OF  MA- 
TERIAL FACTS  BY  PROMOTERS  AS  GROUND  FOR  RESCISSION 
OF  SUBSCRIPTIONS  FOR  SHARES,  OR  AS  A  DEFENCE  TO  SUITS 
THEREON  BY  THE  CORPORATION. 


§  173.  Responsibility  of  corpora- 
tion for  misrepresentation 
or  non-disclosure  by  pro- 
moters before  corporation 
formed. 

174.  Subscriber  s'    remedies 

against  corporation  for 
fraudulent  misrepresenta- 
tion by  promoters. 

175.  Remedy    when    misled    by 

non-disclosure  of  facts  by 
promoters. 

176.  Dicta  of    Vice  Chancellor 

Kindersley. 

177.  Dicta  of  Lord  Chelmsford. 

178.  Standard  of  duty  as  to  dis- 

closure required  by  dicta 
quoted.  Whether  legal  or 
moral  duty. 

179.  Peek   v.    Gurney,  L.   R.   6 

H.  L.  377. 

180.  Duty  to  disclose    material 

facts  not  a  legal  duty, 
when  omission  does  not 
make  facts  stated  false. 

181.  Absence  of  direct  decisions 

on  this  point.  Reasons 
for  and  against  require- 
ment of  disclosure. 

182.  Contracts    to    take    shares 

governed  by  maxim  caveat 
emptor. 

183.  Views  of  Brett,  J.,  expressed 

in  Cover's  Case,  1  Ch.  D. 
182. 


§  184.  Relief  obtainable  in  Equity, 
and  in  some  jurisdictions 
at  law,  against  innocent 
misrepresen  tation. 

185.  No  relief  at  law  where  dis- 

tinction in  procedure  be- 
tween action  at  law  and 
suit  in  Equity  adhered  to. 

186.  Principle  on   which  Equity 

rescinds  or  refuses  to  en- 
force contract  induced  by 
innocent  misrepresenta- 
tion. 

187.  Proof  necessary  to  obtain  re- 

scission of  contract  of  sub- 
scription on  ground  of  in- 
nocent misrepresentation. 

188.  Laches  as  a  bar  to  rescis- 

sion of  contract  of  sub- 
scription. 

189.  Waiver  of  right  to  avoid 

subscription  on  ground  of 
misrepresentation. 

190.  Burden  of  proof  on  question 

of  laches  or  waiver. 

191.  Rule  in  England  as  to  effect 

of  corporate  insolvency 
on  right  to  rescind  con- 
tract of  subscription. 

192.  Tendency    of    decisions   in 

this  country. 

193.  Repudiation  of  contract  of 

subscription  without  suit 
for  rescission  effective, 
although  corporate  insol- 
vency proceedings  subse- 
quently begun. 


§  173.  Responsibility  of  corporation  for  misrepresentation 
or  non-disclosure  by  promoters  prior  to  its  formation.  — 
Although,  as  a  general  rule,  a  corporation  is  not  responsible 
in  tort  or  otherwise  for  misrepresentations  made  by  pro- 


180    PROMOTERS  AND  PKOMOTION  OF  CORPORATIONS. 

moters  before  the  corporation  comes  into  existence,1  still, 
when  the  contract  of  subscription  has  been  induced  thereby, 
a  remedy  may  be  had  in  certain  cases  against  the  corpora- 
tion. When  the  corporation  can  be  held,  before  the  contract 
is  complete,  with  the  knowledge  that  it  is  induced  by  such 
misrepresentation,  —  as,  for  example,  when  the  directors  on 
allotting  the  shares  know  the  fact  that  the  application  for 
them  has  been  so  induced,  —  the  subscriber,  if  he  conies 
seasonably,  is  entitled  to  rescission.2  A  subscriber  who 
acts  seasonably  may  also  procure  rescission  when  he  has 
subscribed  on  the  faith  of  a  prospectus  containing  misrepre- 
sentations, issued  by  promoters  prior  to  the  formation  of 
the  corporation.  The  application  to  the  corporation,  when 
formed,  for  shares,  being  based  on  the  prospectus,  cannot 
be  dissevered  by  the  corporation  from  the  prospectus. 
"The  offer  to  take  shares,"  as  Lindley,  L.  J.,  said,  "is 
an  offer  to  take  them  on  the  terms  of  the  prospectus,  and 
on  no  other  terms ;  and  the  acceptance  of  the  application 
by  the  allotment  of  shares  is  an  acceptance  of  the  offer  on 
those  terms,  and  not  on  other  terms."  3  With  these  prem- 
ises, a  consideration  may  now  be  had  of  the  subscribers' 
remedies  against  the  corporation  for  misrepresentations  by 
promoters  for  which  the  corporation  is  responsible. 

§  174.  Subscribers'  remedies  against  corporation  for  fraud- 
ulent misrepresentation  by  promoters.  —  A  misrepresentation 
may  be  innocent  or  fraudulent.  When  it  is  fraudulent, 
and  an  action  to  recover  damages  for  the  deceit  could  be 
maintained,  several  remedies  against  the  corporation  are 

1  Burnes  v.  Pennell,  2  H.  L.  C.  497;  Felgate's  Case,  2  De  G.,  J.  & 
S.  456;  Ex  parte  Worth,  4  Drew,  529;  Duranttfs  Case,  26  Beav.  268; 
St.  John's  Mfg.  Co.  \.  Hunger  (Mich.  1895),  64  N.  W.  Rep.  3 ;  Belav 
v.  Bryan,  89  Iowa,  348. 

2  Lynde  v.  Anglo-ftalian  Hemp  Spinning  Co.  1  Ch.  (1896),  178  ;  Law 
v.  Grant,  37  Wise.  548. 

•  Karberg's  Case  (1892),  3  Ch.  1. 


REMEDIES   OF  SUBSCRIBERS.  181 

open  to  the  subscriber,  if  he  acts  seasonably,1  in  addition 
to  that  afforded  by  an  action  of  deceit.  1.  If  he  has  paid 
for  his  shares,  in  full  or  in  part,  he  may,  upon  tender  of 
his  shares  to  the  corporation,  recover  from  it,  in  an  action 
at  law  for  money  had  and  received,  what  he  has  paid.2 
2.  He  may,  when  sued  by  the  corporation  upon  the  sub- 
scription, interpose  the  fraud  as  a  defence.3  3.  He  may 
begin  a  suit  in  equity  to  rescind  the  subscription  and  to 
recover  payments,  if  any,  which  he  has  made  thereon. 
"  This,"  says  Mr.  Cook,  "  is  the  most  fair,  safe,  and  con- 
venient remedy  that  the  subscriber  has.  It  is  a  decisive 
notice  to  the  corporation  and  all  third  parties  not  to  rely 
upon  the  subscription  in  question.  It  avoids  the  risk  of 
future  corporate  insolvency.  It  enables  the  subscriber  to 
set  aside  the  contract,  to  enjoin  actions  at  law  for  calls, 
and  to  recover  back  payments  made  before  discovery  of  the 
fraud."  4  And  when  several  persons  have  been  induced  to 
subscribe  for  shares  by  the  same  fraudulent  misrepresenta- 
tions, as  in  the  case  of  a  fraudulent  prospectus  addressed  to 
all  of  them,  and  on  which  they  all  act,  they  may  join  in  a 
bill  against  the  corporation  and  the  promoters  who  issued 
the  prospectus,  to  procure  rescission  of  their  subscriptions 
and  to  recover  the  moneys  paid  thereon.5  In  decreeing  re- 
scission, the  Court  will  allow  interest  on  the  money  actually 
paid  by  the  subscriber  on  his  shares.  Interest  is  not  allowed 
by  way  of  damages,  but  on  the  ground  that  the  parties  are 
to  be  restored  as  far  as  possible  to  their  original  position.6 

1  As  to  \vhat  is  seasonable  action,  see  Sects.  188,  193. 

2  Granger's  Ins.  Co.  v.  Turner,  61  Ga.  561 ;  Hamilton  v.  Granger's 
Ins.  Co.,  67  Ga.  145. 

8  Deposit  Life  Ins.  Co.  v.  Ayscough,  6  E.  &  B.  761  ;  Bivleh-y-plom  Lead 
Mining  Co.  v.  Baynes,  36  L  J.  (Ex.)  183;  Sanford  v.  Handy,  23 
Wend.  260;  Crump  v.  U.  S.  Mining  Co.,  1  Gratt.  (Va.)  353. 

4  Cook  on  Stockholders,  Sect.  155. 

6  Bosher  v.  Richmond  if  Harrisonburg  Land  Co.,  89  Va.  455. 

6  Karberg's  Case  (1892),  3  Ch.  1. 


182    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

§  175.  Subscribers'  remedy  against  corporation  when  mis- 
led by  non-disclosure  of  material  facts  by  promoters.  —  All 
action  of  deceit  will  not  lie  for  non-disclosure  of  material 
facts,  when  it  is  not  such  as  to  render  the  statement  actu- 
ally made  a  misrepresentation.1  The  question  then  arises 
whether  for  non-disclosure  of  this  nature,  by  which  a  sub- 
scriber has  been  misled,  any  remedy  against  the  corporation 
may  be  had.  While  the  rule  is  that  mere  non-disclosure 
does  not  create  a  liability  ex  delicto,  it  may  affect  the  validity 
or  operation  of  the  contract  in  a  certain  exceptional  class  of 
contracts,  such  as  contracts  of  insurance,  in  which  the  duty 
of  disclosure  is  imposed  by  law.  It  is  said  by  Sir  Frederick 
Pollock,  that  contracts  to  take  shares  in  corporations  fall, 
by  analogy  to  contracts  of  partnership,  within  the  class  of 
contracts  thus  exceptionally  treated,2  "inasmuch  as  the 
public  to  whom  promoters  address  themselves  are  for  the 
most  part  not  versed  in  the  particular  kind  of  business 
proposed,  but  are  simply  persons  in  search  of  an  invest- 
ment for  their  money,  and  with  slight  means  at  hand,  if 
any,  of  verifying  the  statements  made  to  them."  3  Another 
eminent  English  writer  also  lays  it  down  that  in  contracts 
to  take  shares  in  corporations  there  is  a  special  duty  to 
disclose  material  facts,  a  breach  of  which  may  invalidate 
the  contract.4  But  no  case  can  be  found,  it  is  believed,  in 
which  it  has  been  decided  that  promoters  merely  as  such 
or  other  persons  soliciting  subscriptions  for  shares  of  stock 
of  a  corporation  are  subject  to  a  legal  duty  to  disclose  the 

1  See  Sects.  149,  150. 

2  But  Sir  William  Anson  asserts  that  contracts  of  partnership  do 
not  require  a  full  disclosure  of  all  facts  which  might  affect  the  judg- 
ment of  the  intending  partner,  nor  the  same  fulness  of  disclosure 
which,  in  his  opinion,  is  necessary  to  the  contract  to  allot  shares. 
Anson  on  Contracts,  159. 

8  Pollock  on  Contracts,  487,  508. 
4  Anson  on  Contracts,  6th  ed.,  158. 


REMEDIES   OF   SUBSCRIBERS.  183 

material  facts  touching  the  proposed  corporate  enterprise,  un- 
less they  have  put  themselves  in  a  fiduciary  position  toward 
the  persons  with  whom  they  deal.  Sir  Frederick  Pollock  and 
Sir  William  Anson  support  their  propositions  by  reference 
to  certain  dicta  by  Kindersley,  Y.  C.,  and  Lord  Chelmsford. 

§  176.  Dicta  in  New  Brunswick  &  Canada  Ry.  Co.  v. 
Muggeridge.1  —  Vice-Chancellor  Kindersley  said:  "Those 
who  issue  a  prospectus  holding  out  to  the  public  the  advan- 
tages which  will  accrue  to  persons  who  will  take  shares  in 
the  proposed  undertaking,  and  inviting  them  to  take  shares 
.  on  the  faith  of  the  representations  therein  contained,  are 
bound  to  state  everything  with  strict  and  scrupulous  accu- 
racy, and  not  only  to  abstain  from  stating  as  a  fact  that 
which  is  not  so,  but  to  omit  no  one  fact  within  their 
knowledge,  the  existence  of  which  might  in  any  degree 
affect  the  nature,  extent,  or  quality  of  the  privileges  and 
advantages  which  the  prospectus  holds  out  as  inducements 
to  take  shares." 

§  177.  Dicta  in  Central  Ry.  Co.  of  Venezuela  v.  Kisch.2  — 
Lord  Chelmsford,  referring  to  a  prospectus,  observed  :  "  In 
an  advertisement  of  this  description  some  allowance  must 
always  be  made  for  the  sanguine  expectations  of  the  pro- 
moters of  the  adventu-re,  and  no  prudent  man  will  accept 
the  prospects  which  are  always  held  out  by  the  originators 
of  every  new  scheme  without  considerable  abatement.  But 
although  on  its  introduction  to  the  public  some  high  color- 
ing and  even  exaggeration  in  the  description  of  the  advan- 
tages which  are  likely  to  be  enjoyed  by  the  subscribers  to 
an  undertaking  may  be  expected,  yet  no  misstatement  or 
concealment  ought  to  be  permitted.  In  my  opinion,  the 

1  1   Dr.  &  Sm.  at  p.  381 ;  S.  C.  30  L.  J.  Ch.  242.      This  was  a 
bill  by  the   company  for  specific   performance  of  a  subscription  for 
shares. 

2  L.  R.  2  H.  L.  at  p.  113.     This  was  a  bill  to  rescind  a  subscription 
for  shares. 


184        PROMOTERS  AND   PROMOTION   OF   CORPORATIONS. 

public  who  are  invited  by  a  prospectus  to  join  any  new 
adventure  ought  to  have  the  same  opportunity  of  judging 
of  everything  which  has  a  material  bearing  on  its  true 
character  as  the  promoters  themselves  possess.  It  cannot 
be  too  frequently  or  too  strongly  impressed  upon  those 
who,  having  projected  any  undertaking,  are  desirous  of 
obtaining  the  co-operation  of  persons  who  have  no  other 
information  on  the  subject  than  that  which  they  choose  to 
convey,  that  the  utmost  candor  and  honesty  ought  to 
characterize  their  published  statements." 

§  178.  Standard  of  duty  as  to  disclosure  required  by  dicta 
quoted.  "Whether  legal  or  moral  duty.  —  The  rule  as  to 
strict  accuracy  of  statement  laid  down  in  the  dicta  of  Vice 
Chancellor  Kindersley  is  somewhat  modified,  it  will  be 
observed,  in  the  dicta  of  Lord  Chelmsford ;  but  there  is  an 
agreement  in  this,  that  it  is  the  duty  of  promoters  issuing 
a  prospectus  to  disclose  all  material  facts  within  their 
knowledge.  This  is  not  so  high  a  standard  as  that  main- 
tained in  marine  insurance,  where  the  assured  must  not 
only  communicate  to  the  insurer  information  of  all  ma- 
terial facts  touching  the  risk  of  which  the  assured  has 
knowledge,  but  must  disclose  all  material  facts  of  which 
in  the  ordinary  course  of  business  he  ought  to  have 
knowledge,  and  must  use  due  diligence  to  obtain  all  due 
information  as  to  the  subject  matter  of  the  insurance. 
Whatever  the  duty  of  disclosure  in  a  prospectus  inviting 
share  subscriptions  may  be,  "  it  is  not  the  same,"  to  use 
the  language  of  Lord  Watson  in  a  late  case  in  the  House 
of  Lords,  "  as  in  the  case  of  a  proposal  for  marine  insur- 
ance. In  an  honest  prospectus  many  facts  and  circum- 
stances may  be  lawfully  omitted,  although  some  subscribers 
might  be  of  the  opinion  that  these  would  have  been  of 
materiality  as  influencing  the  exercise  of  their  judgment."  1 

1  Aaron's  Reef  Co.  v.  Twiss  (1896),  A.  C.  273. 


EEMEDIES   OF   SUBSCRIBERS.  185 

Assuming  that  it  is  the  duty  of  promoters  who  issue  a 
prospectus  to  induce  share  subscriptions,  to  disclose  all 
material  facts  within  their  knowledge,  the  question  arises 
whether  this  is,  as  contended  by  Sir  Frederick  Pollock  and 
Sir  William  Anson,  a  legal  duty. 

§  179.  In  Peek  v.  Gurney,1  the  plaintiff  having  taken 
shares  in  a  company,  on  the  faith  of  a  prospectus,  and 
having  sustained  loss  thereby,  brought  a  suit  for  damages 
against  the  persons  by  whom  the  prospectus  was  issued. 
He  set  up  the  non-disclosure  by  those  persons  of  material 
facts  within  their  knowledge, — facts  so  material  that  if 
they  had  been  disclosed  no  subscriptions  could  have  been 
obtained.  In  the  argument,  the  dicta  of  Vice  Chancellor 
Kindersley  and  of  Lord  Chelmsford  were  quoted  and 
relied  upon.  In  delivering  judgment,  Lord  Chelmsford 
said :  "  That  there  was  a  moral  obligation  upon  the  re- 
spondents not  to  put  forward  a  scheme  which  depended 
for  its  success  upon  keeping  the  public  in  ignorance  of 
what  ought  in  fairness  to  be  made  known  to  them,  no  one 
can  doubt.  ...  As  this  was  an  experiment  which  was  to 
be  made  with  the  money  of  other  persons  as  well  as  their 
own,  they  were  bound  to  give  all  those  other  persons 
such  information  as  they  themselves  possessed  to  enable 
a  competent  judgment  to  be  formed  as  to  the  prudence 
of  joining  the  proposed  company.  The  question,  however, 
is  not  as  to  the  moral  obligation  of  the  respondents, 
but  whether  their  intentional  concealment,  from  whatever 
motive,  of  a  fact  so  material  that  if  it  had  been  made 
known  no  company  could  have  been  formed,  renders  them 
liable  to  an  action  for  damages,  or  to  the  analogous 
proceeding  in  equity,  by  the  appellant,  who  was  led  by  it 
to  purchase  shares  in  the  company,  by  which  he  has  been 
subjected  to  a  most  serious  loss.  This  case  is  entirely 

i  L.  E.  6  H.  L.  377. 


186    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

different  from  suits  instituted  to  be  relieved  from,  or  for 
the  enforcement  of,  contracts  induced  by  the  fraudulent 
concealment  of  facts  which  ought  to  have  been  disclosed. 
...  It  is  a  suit  instituted  to  recover  damages  from  the 
respondents  for  the  injury  the  appellant  has  sustained  by 
having  been  deceived  and  misled  by  the  misrepresentation 
and  suppression  of  facts  to  become  a  shareholder  in  the 
proposed  company  of  which  they  were  promoters.  It  is 
precisely  analogous  to  the  common  law  action  for  deceit. 
There  can  be  no  doubt  that  equity  exercises  a  concurrent 
jurisdiction  in  cases  of  this  description,  and  the  same 
principles  applicable  to  them  must  prevail  both  in  law 
and  in  equity.  I  am  not  aware  of  any  case  in  which  an 
action  of  law  has  been  maintained  against  a  person  for  an 
alleged  deceit  charging  merely  a  concealment  of  a  ma- 
terial fact  which  he  was  morally,  but  not  legally,  bound 
to  disclose." 

Lord  Cairns  said :  "  Mere  non-disclosure  of  material 
facts,  however  morally  censurable,  however  that  non-dis- 
closure might  be  a  ground  in  a  proceeding  at  a  proper 
time  for  setting  aside  an  allotment  on  a  purchase  of 
shares,  would,  in  my  opinion,  form  no  ground  for  an 
action  in  the  nature  of  an  action  for  misrepresentation. 
There  must  in  my  opinion  be  some  active  misstatement 
of  fact,  or,  at  all  events,  such  a  partial  and  fragmentary 
statement  of  facts  as  that  the  withholding  of  that  which 
is  not  stated  makes  that  which  is  stated  absolutely  false." 

§  180.  Duty  to  disclose  material  facts  not  a  legal  duty,  when 
omission  does  not  make  facts  stated  false.  —  The  natural 
deduction  from  the  decision  in  this  case  would  seem  to  be 
that,  while  there  is  a  moral,  there  is  not  a  legal  duty  incum- 
bent upon  promoters  who  invite  subscriptions  for  shares  to 
disclose  all  material  facts  within  their  knowledge  ;  that  the 
legal  duty  of  promoters  in  respect  to  disclosure,  is  simply  not 


REMEDIES   OF   SUBSCKIBEES.  187 

to  omit  a  statement  of  facts  when  such  omission  would  make 
the  statement  which  has  been  made  false.  The  question  of 
the  right  of  a  subscriber  to  be  relieved  from  his  subscrip- 
tion, in  equity,  on  the  ground  that  he  has  been  misled  by 
a  breach  of  the  moral  duty  of  the  promoters  in  failing  to 
disclose  facts  which  were  material,  but  the  non-disclosure 
of  which  did  not  have  the  effect  of  rendering  the  statement 
actually  made  false,  is  suggested,  but  not  decided.1 

§  181.  Absence  of  direct  decisions  on  question.  Reasons 
for  and  against  requirement  of  disclosure.  —  The  theory  that  a 
subscriber  may  be  relieved  from  his  contract  of  subscrip- 
tion, when  he  can  show  that  he  would  not  have  entered 
into  the  contract  if  the  persons  who  induced  him  to  do  so 
by  means  of  representations  had  disclosed  every  material 
fact  within  their  knowledge  which  might  have  influenced 
his  judgment  in  determining  the  expediency  of  becoming  a 
subscriber,  is  not  affirmed  nor  denied,2  it  is  believed,  by 
any  direct  decision.  As  conducive  to  fair  dealing  and 
for  the  protection  of  the  ignorant,  the  careless,  and  the 
trusting,  in  such  transactions,  it  may  be  deemed  desirable 
that  the  remedy  stated  should  be  afforded.  "  The  general 
public,"  said  Lord  Brain  well,  "  is  so  at  the  mercy  of  pro- 
moters, sometimes  dishonest,  sometimes  over-sanguine,  that 
it  requires  all  the  protection  that  the  law  can  give  it."  3 

"  There  are  cases,"  said  Chief  Justice  Cockburn,  "  in 
which,  in  the  absence  of  active  fraud,  passive  misrepresen- 
tation, that  is  to  say,  silence  as  to  some  fact  which  it 

1  See  also  Arkwright  v.  Newbold,  17  Ch.  D.  301. 

2  In  Pulsford  v.  Richards,  17  Beav.  87,  Heymann  \.  European  Cen- 
tral Ry.  Co.,  7  Eq.  154,  and  Doris  v.  French,  4  Hun,  292,  there  was  non- 
disclosure, and  relief  was  refused,  but  it  appears  to  have  been  on  the 
ground  that  the  facts  withheld  were  not  such  as  to  warrant  subscribers 
in  saying  that  if  they  had  known  of  them  they  would  not  have  taken 
shares. 

8  Derry  v.  Peek,  14  App.  Cas.  at  p.  344. 


188        PROMOTERS   AND   PROMOTION  OF   CORPORATIONS. 

would  be  material  to  the  one  party  to  know,  but  which 
the  other  is  not  legally  bound  to  communicate,  may  in- 
volve the  one  in  loss,  but  in  which  the  party  suffering 
what  amounts  to  a  moral,  but  not  a  legal  wrong,  has  no 
remedy  at  law.  In  the  ordinary  transactions  of  life,  an 
individual  can  make  inquiries  and  require  positive  infor- 
mation, or  insist  on  a  warranty,  before  entering  into  a 
contract,  or  embarking  in  a  common  enterprise.  But  in 
these  vast  undertakings,  carried  on  by  the  united  enter- 
prise and  capital  of  hundreds,  perhaps  thousands,  of  share- 
holders, the  individual  shareholder  is  more  or  less  at  the 
mercy  of  those  who  invite  him  to  join  the  company,  as 
to  the  facts  on  which  he  may  be  led  to  invest  his  money." l 
On  the  other  hand,  it  may  be  thought  better  "  to  teach 
people  to  look  after  themselves,  and  not  have  this  sort  of 
paternal  legislation  taking  care  of  them  and  giving  them 
information  they  will  not  take  the  trouble  to  ask  for."  2 

§  182.  Contracts  to  take  shares  apparently  governed  by 
maxim  caveat  emptor.  — But,  however  this  may  be,  not 
only  is  there  an  absence  of  adjudication  in  support  of 
the  theory  maintained  by  Sir  Frederick  Pollock  and  Sir 
William  An'son,  that  the  mere  non-disclosure  of  material 
facts  may  affect  the  validity  and  operation  of  a  contract 
to  take  shares  in  a  corporation,  but  the  dicta  relied  on 
by  them  indicate,  it  is  submitted  it  has  been  shown,  merely 
a  moral,  and  not  a  legal,  duty  of  disclosure.  Moreover, 
in  these  dicta  there  is  no  expression  of  opinion  on  the 
question,  whether,  under  any  circumstances,  a  breach  of 
this  duty  entitles  a  subscriber  who  has  been  misled  thereby 
to  be  relieved  in  equity.  Opposed  to  the  view  that  relief 

1  Twycross  v.  Grant,  2  C.  P.  D.  at  p.  532. 

2  Bramwell,  L.  J.,  construing  the  section  of  the  Companies  Acts 
which  relates  to  disclosure  in  prospectuses,  in  Twycross  v.  Grant,  supra, 
at  p.  498. 


REMEDIES   OF   SUBSCRIBERS.  189 

may  be  had  in  such  a  case,  is  the  view  expressed  by  Lord 
Justice  Lindley  in  his  work  on  the  Law  of  Companies : 
"  In  all  contracts  of  buying  and  selling,  the  maxim  is 
caveat  emptor ;  and  contracts  to  take  shares  are  apparently 
governed  by  this  rather  than  by  any  other  principle." 1 

§  183.  In  Gover's  Case,3  Brett,  J.,  stating  the  law  as  it 
appeared  to  him  to  have  been  before  the  enactment  of  that 
section  of  the  Companies  Act  which  makes  non-disclosure 
of  certain  contracts,  when  a  prospectus  is  issued,  fraud- 
ulent, said :  "  For  mere  non-disclosure,  fraudulent  or 
otherwise,  which  had  not  the  effect  of  rendering  that 
which  was  disclosed  or  stated  a  misrepresentation,  how- 
ever otherwise  important  for  the  consideration  of  an  in- 
tended subscriber,  there  was  no  remedy,  either  in  law 
or  equity,  if  he  became  a  registered  shareholder."  In 
a  late  ease  in  the  Court  of  Appeal,  Rigby,  L.  J.,  said: 
"I  think  the  law  is  this, — that  if  a  person  relies,  as  a 
ground  for  the  rescission  of  a  contract,  on  the  omission 
of  a  statement,  he  must  show  that  the  omission  of  that 
statement  makes  what  is  stated  misleading.  It  is  not 
that  omission  of  material  facts  is  an  independent  ground 
for  rescission,  but  the  omission  must  be  of  such  a  nature 
as  to  make  the  statement  actually  made  misleading." 3 
In  other  words,  relief  is  not  obtainable  in  cases  of  pure 
non-disclosure  of  or  simple  silence  as  to  material  facts. 

§  184.  Relief  obtainable  in  Equity,  and  in  some  jurisdictions 
at  law.  —  In  an  action  to  recover  damages  for  misrepre- 
sentation it  is  essential,  as  we  have  seen,  to  show  that 
the  party  who  made  the  misrepresentation  had  knowledge 
of  its  falsity  at  the  time  it  was  made.  But  a  misrepresen- 

1  Lindley's  Law  of  Companies,  5th  ed.,  p.  70. 

2  1  Ch.  D.  182. 

«  McKeon  v.  Boudard,  Peveril  Gear  Co.  (1896),  65  L.  J.  Rep.  N.  s. 
735. 


190    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

tation  may  be  an  invalidating  circumstance  in  a  contract 
induced  by  it,  although  knowledge  of  its  falsity  is  not 
shown.  Equity  will  in  a  proper  case  relieve  against  an 
innocent  misrepresentation,1  and  in  several  States  relief 
may  be  had  at  law. 

§  185.  No  relief  at  law  -where  distinction  in  procedure 
bet-ween  action  at  law  and  suit  in  Equity  adhered  to.  —  111 
those  jurisdictions  where  the  distinction  in  procedure 
between  actions  at  law  and  suits  in  equity  has  been  pre- 
served, an  innocent  misrepresentation,  where  there  was 
not  a  duty  to  be  careful  or  to  state  the  facts  correctly, 
will  not  ground  an  action  or  a  defence  to  an  action  at 
law.  Consequently  a  subscriber  who  has  been  led  into 
taking  his  shares  by  an  innocent,  as  distinguished  from 
a  fraudulent  misrepresentation,  cannot  in  such  jurisdic- 
tions avail  himself  of  that  fact  as  a  defence  to  an  action 
at  law  brought  by  the  corporation  on  the  contract  of 
subscription,  nor  can  he,  in  case  he  has  repudiated  the 
contract  and  tendered  back  his  shares,  on  the  ground 
of  the  misrepresentation,  maintain  an  action  at  law  to 
recover  moneys  paid  by  him  on  the  shares.2  His  remedy 

1  Redgrave  v.  Hurd,  20  Ch.  D.  1;  NewUggin  v.  Adam,  34  Ch.  D. 
582;  Rarberg's  Case  (1892),  3  Ch.  1;  Peek  v.  Derry,  14  App.  Cas. 
at  p.  359;  Wilcoxv.  Iowa  Wesleyan  University,  32  Iowa,  367;  Mohlerv. 
Carder,  73  Iowa,  582  ;  Groppengiesser  v.  Lake,  103  Cal.  37 ;    Yeater  v. 
Hines,  24  Mo.  App.  619;  Kountze  v.  Kennedy,  147  N.  Y.  124;  1  Bige- 
low  on  Fraud,  414.    In  Goodwin  v.  Mass.  Loan  Sf  Trust  Co.,  152  Mass, 
at  p.  201,  Field,  Ch.  J.,  said:  "It  does  not  seem  to  have  been  much 
considered  in  this  Commonwealth  whether  the  misrepresentation  on 
account  of  which  a  contract  can  be  rescinded  must  be  in  all  respects 
the  same  as  that  on  which  an  action  for  deceit  can  be  maintained ;  al- 
though, in  England  and  in  many  of  the  States  of  this  country  a  clear 
distinction  has  been  taken  between  the  two,  .  .  .  and  it  may  deserve 
consideration  hereafter  whether  a  contract  cannot  be  rescinded  for  a 
misrepresentation  or  a  concealment  of  facts,  which  would  not  support 
an  action  of  deceit." 

2  Salem  Mill  Dam  Co.  v.  Ropes,  9  Pick.  187;  King  v.  Eagle  Mills, 


REMEDIES  OF   SUBSCRIBERS.  191 

is  to  bring  a  bill  in  equity  to  rescind  the  contract,  and 
to  enjoin  the  prosecution  of  an  action  upon  it  by  the 
corporation.  But  where  equitable  claims  and  defences 
may  be  set  up  at  law,  it  would  seem  that  the  rule  is  other- 
wise, and  that  the  principle  upon  which  equity  affords 
relief  to  one  who  has  been  led  into  a  contract  by  an  in- 
nocent misrepresentation  may  be  invoked  at  law.1 

§  186.  Principle  on  which  Equity  acts  in  matter  of  innocent 
misrepresentation.  —  The  principle  on  which  equity  acts  in 
setting  aside  or  refusing  to  enforce  a  contract  induced  by 
an  innocent  misrepresentation  is  that  it  is  a  constructive 
fraud  for  one  to  insist  on  obtaining  or  retaining  a  benefit 
under  a  contract  procured  by  his  own  untruthful  state- 
ment, however  innocent  he  may  have  been  in  the  first  in- 
stance in  making  that  statement.2 

§  187.  Proof  necessary  to  obtain  rescission  of  contract  of 
subscription  on  ground  of  innocent  misrepresentation.  —  To 
entitle  a  subscriber  for  stock  to  rescind  or  to  procure 
the  setting  aside  of  the  contract  of  subscription,  on  the 
ground  of  simple  misrepresentation,  the  same  things  must 
be  proved  as  in  an  action  of  deceit,  excepting  knowledge 
by  the  defendant  of  the  falsity  of  the  representation,  and, 
when  the  contract  is  executory,  damage  to  the  defendant.3 
When  the  contract  is  executed,  it  would  seem  that  proof 
must  be  furnished  that  injury  has  resulted  to  the  party 
seeking  relief.4  When  the  misrepresentation  which  in- 
duced the  contract  was  made  by  promoters  before  the 

10  Allen,  548  ;  Goodrich  v.  Reynolds,  31  111.  490  ;  Parmelee  v.  Arfolphe, 
28  Ohio  St.  10;  Kennedy  v.  Panama  Mail  Co.,  L.  R.  2  Q.  B.  580. 

1  1  Bigelow  on  Fraud,  414. 

2  Redgrave  v.  Hurd,  20  Ch.  D.  1 ;   Homes'  Appeal,  77  Penn.  50 ; 
Swimm  v.  Bush,  23  Mich.  99. 

8  1  Bigelow  on  Fraud,  541. 

4  Ibid. ;  Jewell  v.  Davis,  10  Allen,  68  ;  Marriner  v.  Dennison,  78  Cal. 
202;  Henninger  v.  Heald,  52  N.  J.  Eq.  431. 


192    PROMOTEES  AND  PROMOTION  OF  CORPORATIONS. 

formation  of  the  corporation,  or  afterwards  by  promoters 
not  acting  as  its  agents,  the  subscriber  cannot,  with  a 
single  exception,  rescind  the  contract  unless  he  can  show 
that,  at  the  time  of  its  acceptance  by  the  corporation,  the 
corporation  knew  that  it  was  induced  by  the  misrepresenta- 
tion. The  exception  is  when  the  subscription  was  made  on 
the  faith  of  a  prospectus,  containing  a  misrepresentation 
issued  by  the  promoters.  In  this  case  it  is  not  necessary  to 
prove  that  the  corporation  had  knowledge  of  the  misrepre- 
sentation at  the  time  the  shares  were  allotted,  for  the  appli- 
cation for  shares  cannot  be  dissevered  from  the  prospectus.1 
§  188.  Laches  as  a  bar  to  rescission  of  contract  of  subscrip- 
tion. —  In  discussing  laches  as  a  bar  to  a  subscriber's  rem- 
edy against  the  corporation,  a  learned  writer  states  that 
"  in  the  remedies  by  action  at  law  the  statute  of  limitations 
governs."  2  Undoubtedly  the  statute  would  prevail  as  a  bar 
at  law,  and  also  in  equity.  But  delay  for  a  shorter  period 
than  the  statutory  limitation  may,  as  constituting  waiver,  at 
law,  as  well  as  in  equity,  defeat  the  right  to  rescission.3  To 
rescind  the  contract,  or  to  have  it  set  aside,  the  subscriber 
must,  within  a  reasonable  time  after  learning,  or  after  he 
might  and  should  have  learned  the  truth,  repudiate  the 
contract  and  tender  back  his  shares,  or  bring  a  bill  for  re- 
scission. He  will  not  be  permitted  to  wait  and  see  how  the 
speculation  turns  out,  in  order  that  he  may  shape  his  action 
accordingly.  "A  man  must  not  play  fast  and  loose;  he 
must  not  say,  *  I  will  abide  by  the  company  if  successful, 
and  I  will  leave  the  company  if  it  fails  ; '  and  therefore, 

1  Tamplin's  Case  (1892),  W.  N.  146.     See  Section  173.     The  remedy 
is  limited  to  the  subscriber.     It  does  not  extend  to  a  vendee  of  a 
shareholder,  because  the  office  of  the  prospectus  is  exhausted  when  the 
shares  are  allotted.     Peek  v.  Gurney,  L.  R.  6  H.  L.  377. 

2  Cook  on  Stockholders,  Sect.  161. 

8  Duffield  v.   E.  T.  Barnum   Wire  $  Iron  Works,   64  Mich.   293 ; 
Perley  v.  Balch,  23  Pick.  283. 


KEMEDIES   OF   SUBSCRIBERS.  193 

when  a  misrepresentation  is  made  of  which  any  one  of  the 
shareholders  has  notice  and  can  take  advantage  to  avoid 
his  contract  with  the  company,  it  is  his  duty  to  determine 
at  once  whether  he  will  depart  from  the  company,  or 
whether  he  will  remain  a  member."1  It  is  generally  a 
question  of  fact,  but  in  some  circumstances  a  question  of 
law,  as  to  what  is  a  reasonable  time.2 

§  189.  Waiver  of  right  to  avoid  subscription  on  ground  of 
misrepresentation.  —  The  subscriber  may  waive  his  right  to 
avoid  the  contract  on  account  of  misrepresentation.  Acts, 
after  discovery  of  the  truth,  inconsistent  with  an  inten- 
tion to  rescind  the  contract,  may  constitute  such  waiver. 
Thus,  by  attending  a  stockholder's  meeting,  and  voting  for 
a  levy  of  an  assessment  on  the  capital  stock,  and  subse- 
quently paying  the  assessment  without  objection,3  or  by 
demanding  or  receiving  a  dividend,4  the  subscriber  may 

1  Lord  Romilly,  in  Ashley's  Case,  9  Eq.  263  ;  Taite's  Case,  3  Eq, 
795;  Peek's  Case,  2  Ch.  674;  Wilkinson's  Case,  2  Ch.  536;  Heymann  v. 
European  Central  Ry.   Co.,  7  Eq.  154;  Directors  of  Central  By.  Co. 
v.  Kisch,  L.  R.  2  H.  L.  99;    Oakes  v.  Turquand,  L.  R.  2  H.  L.  325; 
In  re  Scottish  Petroleum  Co.,  23  Ch.  D.  413;  Farrar  v.  Walker,  3  Dill. 
(U.    S.)  506;   Upton  v.  Tribilock,  91  U.  S.  45;  Leaving  v.    Wise,  73 
Penn.  173 ;  Dynes  v.  Schaffer,  16  Ind.  165 ;  Parsons  v.  McKinley,  56 
Minn.  464;  Cedar  Rapids  Ins.  Co.  v.  Butler,  83  Iowa,  124  ;  State  v. 
Jefferson  Turnpike  Co.,  3  Humph.  (Tenn.)  305. 

2  Hill  v.  Hobart,   16  Me.   164;   Holbrook  v.   Burt,   22   Pick.  546; 
Flemings.  Weagley,  32  111.  App.  183;  Collins  v.   Townsend,  58  Cal. 
608 ;  Page  v.  McMillan,  41  Wise.  337 ;  Morgan  v.  McKee,  77  Penn. 
228;  Boughton  v.  Standish,  48  Vt.  594. 

But  when  a  stockholder's  shares  have  been  forfeited  for  non-pay- 
ment of  an  assessment  thereon,  it  is  not  incumbent  upon  him  to  take 
any  active  step  to  avoid  the  contract  of  subscription  if  it  was  induced 
by  misrepresentation ;  he  is  justified  in  awaiting  the  company's 
attack;  and  when  the  company  brings  suit  against  him  he  may  plead 
the  misrepresentation  as  a  defence.  Aaron's  Reef  Co.  v.  Twiss  (1896), 
A.  C.  273. 

'  Marten  v.  Paul  0.  Burns  Wine  Co.,  99  Cal.  355. 

*   Weiseger  v.  Richmond  Ice  Machine  Co.,  90  Va.  795. 

13 


194        PROMOTERS  AND   PROMOTION   OF   CORPORATIONS. 

waive  his  right  to  relief.  Such  acts,  however,  are  not  con- 
clusive on  the  question.1  When  the  stock  has  been  ten- 
dered in  rescission  and  refused,  the  subscriber  has  a  right  to 
do  any  acts  in  regard  to  the  stock  reasonably  necessary  to 
protect  his  interests,  and  at  the  same  time  to  maintain  his 
claim  to  rescind.  The  jury  may  infer  from  acts  of  owner- 
ship prima  facie  inconsistent  with  the  demand  for  rescission, 
that  the  subscriber  has  waived  his  demand,  but  the  apparent 
inconsistency  may  be  dissipated  by  evidence  that  such  acts 
were  properly  done  in  the  way  of  protection  only,  the  right 
to  rescind  being  at  the  same  time  insisted  upon.2 

§  190.  Burden  of  Proof.  —  The  burden  of  proof  to  estab- 
lish laches  or  waiver  is  on  the  corporation.  Accordingly, 
in  an  action  for  calls  on  shares,  when  the  defendant  pleads 
that  he  was  induced  to  take  the  shares  by  fraud,  it  is  not 
for  him  to  show  that  he  repudiated  the  contract  as  soon  as 
he  became  aware  of  the  fraud,  but  it  is  for  the  plaintiff  to 
show  that  the  defendant  adhered  to  the  contract  notwith- 
standing his  discovery  of  the  fraud.3  . 

§  191.  English  rule  as  to  effect  of  corporate  insolvency  on 
right  to  rescind  subscription.  —  It  is  settled  in  England  that 
the  right  of  a  subscriber  to  avoid  the  contract  of  subscrip- 
tion is  lost,  unless  he  rescinds  the  contract  and  brings  suit 
to  procure  the  removal  of  his  name  from  the  list  of  share- 
holders before  proceedings  are  instituted  by  or  against  the 
corporation  for  a  distribution  of  its  assets  on  account  of  in- 
solvency. But  the  subscriber  is  in  time  if  he  brings  his  suit 
prior  to  such  proceedings,  although  the  corporation  is  as  a 


1  Stewart's  Case,  I  Ch.  574 ;   Wontner  v.  Sharp,  4  C.  B.  404 ;  Phila- 
delphia, Wilmington,  fr  Baltimore  R.   R.    Co.  v.  Cowell,  28  Penn.  329; 
McCully  v.  Pittsburg  £  Connellsville  R.  R.  Co.,  32  Penn.  25. 

2  Jessop  v.  Ivory,  158  Penn.  71. 

8  Aaron's  Reefy.  Twiss  (1896),  A.  C.  273;  Lindsay  Petroleum  Co. 
v.  Hurd,  L.  R.  5  P.  C.  221. 


EEMEDIES  OF   SUBSCRIBERS.  195 

fact  insolvent  when  his  suit  is  begun.1  The  rule  is  based 
on  the  provisions  of  the  winding-up  acts.2  Under  these  acts, 
a  public  officer  is  appointed  to  keep  a  register  of,  amongst 
other  things,  the  name  of  the  projected  company,  a  state- 
ment of  the  nature  of  the  intended  business,  the  amount 
of  its  capital,  the  names  and  addresses  of  subscribers,  with 
the  number  of  shares  taken  by  them,  and  the  amount  paid 
on  each  share.  And  it  is  provided  that,  in  the  event  of  a 
company  being  wound  up,  every  member  shall  be  liable,  if 
the  company  is  a  limited  liability  company,  to  pay  in  the 
amount  unpaid  on  his  shares,  or,  if  the  liability  of  the 
shareholders  is  not  limited,  to  pay  in  an  amount  sufficient 
to  satisfy  the  claims  of  creditors.  The  status  of  registered 
shareholders  as  contributories  is  thus  fixed  by  winding-up 
proceedings.3 

§  192.  Tendency  of  decisions  in  this  country.  —  In  this 
country,  the  tendency  of  the  decisions  is  toward  the  view  that 
creditors  of  the  corporation  who  become  such  subsequent  to 
stock  subscriptions,  and  without  notice  of  equities  between 

1  Oakes  v.  Turquand,  L.  R.  2  H.  L.  325  ;  Reese  River  Silver  Mining 
Co.  v.  Smith,  L.  R.  4  H.  L.  64  ;  Tennent  v.  City  of  Glasgow  Bank, 
4  App.  Cas.  615 ;  Cat-ling  v.  Bank  of  London  ff  Leeds,  56  L.  J.  Ch. 
321. 

2  In  re  Scottish  Petroleum  Co.,  23  Ch.  D.  413. 

8  Compare  the  United  States  National  Banking  Act,  which  pro- 
vides that  a  certificate  shall  be  filed  with  the  Comptroller  of  the  Cur- 
rency, containing,  among  other  things,  a  statement  of  the  capital  stock 
of  the  proposed  banking  corporation,  the  number  of  shares  into  which 
it  is  divided,  the  names  and  places  of  residence  of  the  shareholders  and 
the  number  of  shares  held  by  each  of  them.  The  corporation  is  re- 
quired to  keep  a  list  of  the  shareholders  open  to  the  inspection  of 
shareholders  and  creditors,  and  annually  to  transmit  a  copy  of  such 
list  to  the  Comptroller  of  the  Currency.  Shareholders  are  individually 
responsible  for  the  corporate  debts  to  an  amount  equal  to  the  par  value 
of  their  shares,  in  addition  to  the  paid-up  value.  On  a  winding-up,  a 
receiver  is  authorized  to  enforce  this  individual  liability.  U.  S.  Re- 
vised Statutes,  Sect.  5133  et  seq. 


196        PROMOTERS  AND   PROMOTION   OF   CORPORATIONS. 

the"  subscribers  and  the  corporation,  stand,  as  to  those  sub- 
scriptions, to  the  extent  of  their  equitable  lien,  in  the  posi- 
tion of  innocent  purchasers  for  value.  As  against  such 
creditors,  the  subscriber's  right  to  rescind  his  contract  of 
subscription  is  lost  if  not  exercised  before  corporate  insol- 
vency proceedings,  voluntary  or  involuntary,  have  been  in- 
stituted, or  some  act  done  that  is  in  law  regarded  as  an  act  of 
insolvency.  It  makes  no  difference  in  what  aspect  the  ques- 
tion is  raised,  —  whether  the  subscriber  who  has  paid  for 
his  stock  repudiates  the  contract  on  the  ground  of  misrepre- 
sentation, and  sues  to  recover  what  he  has  paid,  or  whether 
he  is  sued  for  the  amount  unpaid  on  his  subscription, 
and  defends  on  the  ground  of  misrepresentation.  If,  in 
consequence  of  his  apparent  relations  with  the  corporation 
as  a  subscriber,  innocent  third  parties  have,  upon  the  faith 
of  such  relations,  acquired  rights  which  would  be  preju- 
diced by  a  rescission  of  the  contract  of  subscription,  the 
subscriber  will  not  be  allowed,  in  the  one  case,  to  with- 
draw what  he  has  paid  in,  or,  in  the  other  case,  to  escape 
payment.1 

§  193.  Effect  of  repudiation  of  subscription  -without  suit.  — 
Repudiation  by  any  act  or  acts  of  the  subscriber  which  in 
law  amount  to  a  rescission,  as,  for  example,  when  the  sub- 
scriber notifies  the  corporate  authorities  that  he  repudiates 

1  Morawetz  on  Corporations,  Sects.  839,  840 ;  Duffield  v.  E.  T. 
Barnum  Wire  if  Iron  Works,  64  Mich.  293;  Savage  v.  Bartlett,  78 
Md.  561;  Howard  v.  Turner,  155  Penn.  350;  Ramsey  v.  Thompson 
Mfg.  Co.,  116  Mo.  313;  Michener  v.  Payson,  13  Nat.  Bank  Reg.  49; 
Webster  v.  Upton,  91  U.  S.  65  ;  Upton  v.  Tribilock,  91  U.  S.  45 ; 
Sanger  v.  Upton,  91  U.  S.  56;  Chubb  v.  Upton,  95  U.  S.  665;  Ogilvie 
v.  Knox,  22  How.  (U.  S.)  380;  Upton  v.  Englehart,  3  Dill.  496.  Com- 
pare Cunningham  v.  Edgefield  if  Kentucky  R.  R.  Co.,  2  Head  (Term.), 
23;  Ashmeadv.  Colby,  26  Conn.  287;  Turner  v.  Grangers'  Life  Sf  Health 
Ins.  Co.,  65  Ga.  649;  Hamilton  v.  Grangers'  Life  if  Health  Ins.  Co., 
67  Ga.  145;  Jewell  v.  Rock  River  Paper  Co.,  101  111.  57;  Reederv. 
Maranda,  66  Ind.  486. 


EEMEDIES   OF   SUBSCEIBERS.  197 

the  contract,  and  tenders  back  his  shares,  is  effective  with- 
out a  suit  against  the  corporation  to  set  the  contract  aside, 
although  insolvency  proceedings  are  subsequently  begun ; 
and  in  such  case  it  is  not  necessary,  at  least  in  those  juris- 
dictions where  a  public  registry  of  the  shareholders  is  not 
required  by  law  to  be  kept,  to  begin  suit  before  insolvency 
proceedings  to  procure  the  removal  of  the  shareholder's 
name  from  the  register  of  shareholders.1 

i  Savage  v.  Bartlett,  78  Md.  561;  Fear  v.  Bartlett  (Md.  1895),  32 
At.  Rep.  322;  Upton  v.  Englehart,  3  Dill.  496;  Newton  Nat.  Bank  v. 
Newbiggen,  74  Fed.  Rep.  135.  Mr.  Justice  Miller  has  expressed  the 
opinion  that  a  defrauded  subscriber  has  the  right  to  repudiate  the  con- 
tract of  subscription  after  the  insolvency  of  the  corporation,  if  he  has 
not  had  a  reasonable  time  to  examine  into  the  affairs  of  the  corpora- 
tion before  the  appointment  of  the  assignee.  Farrar  v.  Walker,  3 
Dill.  506.  See  also  Haskell  v.  WortUngton,  94  Mo.  560. 


198    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 


CHAPTER  X. 

RIGHTS   AND   LIABILITIES   OF   CORPORATION   ON   PROMOTERS* 
CONTRACTS. 

ARTICLE  I.  —  Enforcement  by  or  against  the  Corporation  of 
Contracts  made  in  its  Name  and  for  its  Benefit  by  its 
Promoters  before  it  comes  into  Existence. 

ARTICLE  II. — Liability  of  Corporation  to  pay  its  Promoters, 
or  Persons  employed  by  them, for  Services  and  Expenses 
incident  to  its  Formation. 


ARTICLE  I.  —  ENFORCEMENT  BY  OR  AGAINST  THE  CORPORATION  OF 
CONTRACTS  MADE  IN  ITS  NAME  AND  FOR  ITS  BENEFIT  BY  ITS 
PROMOTERS  BEFORE  IT  COMES  INTO  EXISTENCE. 


§  194.  Such  contracts  as  a  rule 
primarily  not  binding 
upon  or  enforceable  by 
the  corporation. 

195.  Penn  Match  Co.  v.  Hapgood, 

141  Mass.  145. 

196.  Long  v.    Citizens'  Bank,  8 

Utah,  104. 

197.  Gooday   v.   Colchester,    &c. 

Ry.Co.,  17Beav.  132.   . 

198.  Buffington     v.     Barden,    80 

Wise.  635. 

199.  By  weight  of  authority,  cor- 

poration cannot  ratify 
contract  made  for  it  be- 
fore its  creation. 

200.  Doctrine  held  by  Lord  Cot- 

tenham. 

201.  Decisions  of  Lord  Cottenham 

questioned. 

202.  Corporation  may  accept  or 

adopt  contracts  made  for 
it  prior  to  its  creation. 

203.  Effect  of  such  adoption  or 

acceptance. 


§  204.    Acceptance  or  adoption  may 
be  express. 

205.  Stanton    v.    New    York    & 

Eastern  R.  R.  Co.,  69 
Conn.  272. 

206.  Acceptance  or  adoption  by 

corporation  may  be  in- 
ferred from  its  acts. 

207.  Taking  benefit  of  contract 

may  be  evidence  of  ac- 
ceptance or  adoption. 

208.  Circumstances  under  which 

it  establishes  acceptance 
or  adoption. 

209.  Battelle      v.    Northwestern 

Cement  &  Concrete  Pave- 
ment Co.,  37  Minn.  89. 

210.  Pittsburg  &  Tennessee  Cop- 

per Co.  v.  Quintrell,  91 
Tenn.  693. 

211.  Acceptance  by  corporation 

of  subscriptions  for  shares 
made  before  its  forma- 
tion. 


EIGHTS   AND   LIABILITIES   OF   COKPORATION. 


199 


§  212.  Cases  in  which  term  ratifica- 
tion used  in  sense  of  adop- 
tion or  acceptance. 

213.  Paxton   Cattle  Co.  v.  First 

National  Bank  of  Arrapa- 
hoe,  21  Neb.  021. 

214.  Distinction  between  ratifica- 

tion and  adoption  or  ac- 
ceptance. 


§  215.    English  doctrine  as  to  pro- 
moter's contracts. 

216.  Howard     v.     Patent    Ivory 

Mfg.  Co.,  38  Ch.  D.  156. 

217.  Corporation    cannot    adopt 

or  accept  ultra  vires  con- 
tracts. 


§  194.   Contracts  made  for  corporation  before  it  comes  into 
existence  as  a  rule  not  enforceable  by  or  against  corporation. 

—  Promoters  are  merely  persons  who  for  purposes  of  their 
own  bring  about  the  formation  of  the  corporation.  In  as- 
suming to  make  contracts  in  its  name  or  behalf  before  it 
comes  into  existence,  they  do  not  stand  in  a  relation  of 
agency,  and  they  represent  only  themselves,  inasmuch  as  a 
non-existing  body  cannot  have  agents.  Moreover,  it  is 
ordinarily  the  case  that  the  body  of  shareholders  who  ulti- 
mately constitute  the  corporation  have  no  connection  with 
the  promoters  or  their  acts,  and  take  their  shares  on  the 
assumption  —  and  the  reasonable  assumption  —  that  such 
contracts  as  it  may  be  desirable  for  the  corporation  to  make 
will  be  made  by  it  through  its  known  and  duly  constituted 
officers  or  agents.1  Contracts  made  for  a  corporation  by  its 
promoters  prior  to  its  creation  are  therefore  not  enforce- 
able by  or  against  the  corporation  after  its  organization,2 

1  Earl  of  Shrewsbury  v.  North  Staffordshire  Ry.  Co.,  1  Eq.  593,  614. 

2  Kelnerv.  Baxter,  L.  R.  2  C.  P.  174  ;  Melhado  v.  Porte  Allegre,  New 
Hamburgh,  Sf  Brazilian  Ry.,  L.  R.  9  C.  P.  505;  Eley  v.  Positive  Assur- 
ance Co.,  1  Ex.  D.  88;  Caledonian,  fyc.  Ry.  Co.  v.  Helensburg,  2  Macq. 
391 ;  In  re  Empress  Engineering  Co.,  16  Ch.  D.  125  ;  In  re  Northumber- 
land Hotel  Co.,  33  Ch.  D.  16 ;  Franklin  Fire  Ins.  Co.  v.  Hart,  31  Md. 
59;  Bluehill  Academy  v.  Witham,  13  Me.  403;  Munson  v.  Syracuse,  fyc. 
Ry.  Co.,  103  N.  Y.  58;    Lorillard  v.    Clyde,  122  N.  Y.  498;    Western 
Screw  Sf  Mfg.  Co.  v.  Cawsley,  72  111.  531 ;  Penn  Match  Co.  v.  Hapgood, 
141  Mass.    145;   Abbott  v.    Hapgood,  150   Mass.    252  ;  Buffington  v. 
Barden,  80  Wise.  635;   Long  v.   Citizens'  Bank,  8  Utah,  104;  Moore 
fy  Handly  Hardware  Co.  v.  Tower's  Hardware  Co.,  87  Ala.  206;  Carey 
v.  Des  Moines  Coal  Sf  Mining  Co.,  81  Iowa,  674. 


200        PROMOTERS   AND  PEOMOTION   OF   COEPORATIONS. 

unless  its  charter  provides  otherwise,1  or  unless,  under 
the  doctrines  held  in  this  country,  they  acquire  validity 
through  acceptance,  adoption,  or  ratification  by  the  corpora- 
tion when  formed.  And  this  is  so,  though  the  promoters 
become,  upon  the  formation  of  the  corporation,  its  only 
shareholders,  directors,  and  officers.2 

§  195.  In  Penn  Match  Co.  v.  Hapgood,3  certain  persons 
agreed  to  form  a  corporation  and  to  build  a  factory  for  the 
manufacture  of  matches,  provided  they  could  obtain  certain 
machinery  of  the  defendant,  who  was  a  manufacturer  of 
the  machinery  desired,  and  the  only  person  from  whom  it 
could  be  obtained.  They  informed  the  defendant  of  the 
premises,  and  in  the  name  and  for  the  benefit  of  the  pro- 
posed corporation  applied  to  him  for  the  machinery.  There- 
upon the  defendant  made  contracts  in  writing  to  furnish 
the  corporation  with  the  machinery  upon  specified  terms. 
The  corporation  was  then  formed,  and  a  factory  built  for 
it,  but  the  defendant  refused  to  furnish  the  machinery.  In 

1  Tilson  v.  Warwick  Gaslight  Co.,  4  B.  &  C.  962  ;  In  re  Brampton  Ry. 
Co.,  10  Ch.  177;    Gent  v.  Manufacturers1  Mut.  Ins.  Co.,  107  111.  652; 
Earl  of  Shrewsbury  v.  North  Staffordshire  Ry.  Co.,  1  Eq.  at  p.  615. 

2  Battelle  v.  Northwestern  Cement  fr  Concrete  Co.,  37  Minn.  89.     But 
it  has  been  held  that,  when  persons  associated  together  to  carry  on  a 
business,  contract  debts  in  the  course  of  the  business,  and  afterwards 
convey  the  property  of  the  association  to  a  corporation  formed  by 
them  to  prosecute  the  business,  and  in  which  they  are  the  only  share- 
holders, the  corporation  maybe  liable  in  equity  for  the  payment  of  the 
debts.     "Under  such  circumstances,"   said  the  Court,  "the  property 
of  no  one  but  those  who  contracted  the  debt  and  were  originally  lia- 
able  would  be  taken  or  subjected  to  the  payment  of  it.     The  same 
persons  continue  the  same  business,  with  the  same  property,  with  no 
substantial  change  except  in  name.     In  such  a  case  there  is  no  reason 
why,  in  equity,  the  corporation  should  not  be  primarily  liable  for  the 
debts,  as  it  has  succeeded  to  the  property  of  the  association."    Paxton 
v.  Bacon  Mill,  frc.  Co.,  2  Nev.  257.     See  also  Bergen  v.  Porpoise  Fishing 
Co.,  41  N.  J.  Eq.  238. 

8  141  Mass.  145. 


EIGHTS   AND  LIABILITIES   OF   COKPOKATION.  201 

an  action  for  a  breach  of  the  contract  brought  by  the  cor- 
poration against  the  defendant,  it  was  held  that  on  the 
facts  stated  it  could  not  recover. 

§  196.  in  Long  v.  Citizens'  Bank,1  certain  persons  agreed 
to  form  a  corporation  to  carry  on  a  banking  business  under 
the  name  of  the  Citizens'  Bank.  It  was  arranged  that  one 
Barbour  should  become  the  Cashier ;  and  when  the  corpora- 
tion was  organized  he  was  elected  as  such.  Prior  to  the 
formation  of  the  corporation,  a  certificate  of  deposit  was 
issued,  purporting  to  be  a  certificate  of  deposit  of  the  Citi- 
zens' Bank  for  $1,000  payable  to  a  person  named,  and 
signed  by  Barbour  as  Cashier.  The  plaintiff,  being  an 
innocent  holder  for  value,  brought  suit  on  the  certificate 
against  the  corporation.  It  did  not  appear  that  the  cor- 
poration had  received  any  of  the  moneys  represented  by 
the  certificate.  It  was  held  that  the  corporation  was  not 
liable. 

§  197.  In  Gooday  v.  Colchester,  &c.  Ry.  Co.,2  a  land- 
owner had  withdrawn  his  opposition  to  a  bill  for  the 
incorporation  of  the  defendant  company,  on  an  agreement 
that  the  company  when  incorporated  should  buy  his  lands. 
The  bill  passed,  but  the  company  did  not  take  his  lands. 
The  Court  refused  to  decree  specific  performance. 

§  198.  in  Buffington  v.  Barden,3  the  promoters  of  a  cor- 
poration, before  the  corporation  came  into  existence,  em- 
ployed the  plaintiff  as  an  architect  to  prepare  plans  and 
specifications  for  certain  buildings  which  it  was  designed 
should  be  erected  for  the  purposes  of  the  corporation, 
and  agreed  that  he  should  be  paid  a  stated  sum  for  his 
services.  The  agreement  was  made  in  the  name  of  the  in- 
tended corporation.  The  plaintiff  performed  the  required 
services.  The  corporation  was  subsequently  formed,  but 

1  8  Utah,  104.  »  17  Beav.  132.  •  80  Wise.  635. 


202    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

it  was  not  shown  that  it  had  availed  itself  of  the  labor 
of  the  plaintiff.  It  was  held  that  he  could  not  recover 
from  the  corporation. 

§  199.  By  weight  of  authority  corporation  cannot  ratify 
contract  made  for  it  before  its  creation.  —  According  to  the 
weight  of  authority,  a  contract  made  in  the  name  and  for 
the  benefit  of  a  projected  corporation  by  its  promoters, 
cannot,  either  at  law  or  in  equity,  be  ratified  by  the 
corporation  when  it  comes  into  existence.  Ratification 
implies  an  existing  person  on  whose  behalf  the  contract 
might  have  been  made  at  the  time.  There  cannot  be  a 
ratification  of  a  contract  which  could  not  have  been  made 
binding  on  the  ratifier  at  the  time  it  was  made  because  the 
ratifier  was  not  then  in  existence.1  In  Spiller  v.  Paris 
Skating  Rink?  Malins,  V.  C.,  held  that  the  contract  might 
be  ratified  in  equity ;  but  this  was  overruled  by  later 
decisions.3  The  only  thing  which  results  from  what  is 
called  ratification  of  such  a  contract  is  not  the  ratifica- 
tion of  a  contract  qua  contract,  but  the  creation  of  an 
equitable  liability  depending  upon  equitable  grounds.* 
Thus,  when  promoters  have  rendered  necessary  services 
prior  to  the  creation  of  the  corporation,  of  which  the 
corporation  avails  itself,  it  may  be  inequitable  for  the 

1  Kelner  v.  Baxter,  L    R.  2  C.  P.  174;    Gunnv.  London  Sf  Lanca- 
shire Ins.  Co.,  12  C.  B.   (N.   s.)  694 ;  Melhado  v.  Porte  Allegre,  New 
Hamburgh,  Sf  Brazilian  Railway,  L.  R.  9  C.  P.  503;  Abbott  v.  Hapgood, 
150  Mass,  at  p.  252;  Queen  City  Furniture  If  Carpet  Co.  v.  Crawford, 
127  Mo.  356;  Me  Arthur  v.  Times  Printing  Co.,  48  Minn.  319;  Cook 
v.  Tullis,  18  Wall,  at  p.  338;  Pratt  v.  Oshkosh  Match  Co.,  89  Wise. 
406;    Stainsby  v.  Frazer  Metallic  Life  Boat  Co.,  3  Daly  (N.  Y.),  98; 
Weatherford  Mineral   Wells  Sf  Northwestern  Ry.   Co.   v.  Granger,  86 
Tex.  350. 

2  17  Ch.  D.  368. 

8  In  re  Empress  Engineering  Co.,  16  Ch.  D.  125;  In  re  Northumber- 
land Hotel  Co.,  33  Ch.  D.  16. 

4  James,  L.  J.,  in  In  re  Empress  Engineering  Co.,  16  Ch.  D.  125. 


RIGHTS  AND  LIABILITIES   OF  CORPORATION.  203 

corporation   not  to   pay  the   fair  value  of  those  services 
of  which  it  has  taken  the  benefit.1 

§  200.  Doctrine  held  by  Lord  Cottenham.  —  It  has  also 
been  held  in  a  line  of  cases  decided  by  Lord  Cottenham, 
that  a  corporation  in  whose  name  and  for  whose  benefit 
its  promoters  have,  prior  to  its  coming  into  existence, 
made  a  contract  with  a  person  touching  his  property, 
may  be  equitably  bound  not  to  exercise  its  legal  rights 
in  relation  to  that  property,  save  in  accordance  with 
the  requirements  of  the  contract.  In  Edwards  v.  Grrand 
Junction  Ry.  (7o.,a  promoters  of  a  railway  company,  a 
bill  for  the  incorporation  of  which  was  pending  in  Par- 
liament, in  order  to  do  away  with  the  opposition  of  the 
trustees  of  a  turnpike  road  which  it  was  designed  that 
the  railway  should  cross,  agreed  with  the  trustees  that 
the  road  should  be  carried  over  the  railway  by  a  bridge 
fifty  feet  wide,  the  width  of  the  road.  In  consideration 
of  this  agreement,  the  trustees  withdrew  their  opposition, 
and  the  bill  passed.  The  company  then  undertook  to 
construct  a  bridge  only  thirty  feet  wide.  An  injunction 
was  granted  to  restrain  the  company  from  interfering  with 
the  road  in  any  manner  other  than  that  specified  in  the 
agreement  made  by  the  promoters.  In  Petre  v.  Eastern 
Counties  Ry.  (70. ,3  the  promoters  of  a  railway  agreed  with 
the  plaintiff,  a  peer,  that,  if  he  would  not  oppose  the  bill, 
the  corporation  in  case  the  railway  should  pass  through 
his  lands  would  pay  him  before  entering  them  £120,000. 
The  corporation  having  been  formed,  and  having  the 
power  under  the  act  to  condemn  the  plaintiff's  land,  pro- 

1  In  re  Hereford  Engineering  Co.,  2  Ch.  D.  621 ;  In  re  Empress  En- 
gineering Co.,  16  Ch.  f).  125;  In  re  Dale  &  Plant  Co.,  61  L.  T.  Rep. 
206  (1889). 

2  1  My.  &  Cr.  650. 
»  1  Ry.  Cases,  462. 


204    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

ceeded  to  do  so.  It  was  enjoined.1  See  also  Stanley  v. 
Chester  $  Birkenhead  Ry.  Co.2  In  these  cases  the  con- 
tract was  not  enforced  by  compelling  the  corporation  to 
take  the  land  or  to  deal  with  it  according  to  the  contract. 
The  corporation  was  at  liberty  to  make  its  entry  on  the 
land,  or  not,  as  it  saw  fit ;  but  when  it  elected  to  do  so, 
it  was  held  that,  having  had  the  benefit  of  the  considera- 
tion of  the  contract,  it  was  equitably  bound  not  to  inter- 
fere with  the  rights  of  the  other  party  in  the  land,  save 
in  accordance  with  the  terms  of  the  contract.  The  rea- 
sons upon  which  Lord  Cotteuham  founded  his  judgment 
were  thus  explained  by  him  in  a  later  case : 3  "  The 
right  is  not  properly  speaking  a  right  of  contract,  but 
rather  arises  out  of  the  contract;  but  the  equity  is  this, 
that  what  has  subsequently  taken  place,  and  the  position 
in  which  the  parties  stand,  give  the  party  seeking  the 
benefit  of  the  contract  a  right  to  the  interference  of 
this  Court,  by  virtue  of  an  equity  which  induces  the 
Court  to  prevent  the  company  from  exercising  their  legal 
right,  unless  upon  the  terms  of  adopting  and  giving  effect 
to  the  contract  which  has  been  entered  into  by  other 
parties." 

§  201.  Decisions  of  Lord  Cottenham  questioned.  —  These 
decisions  of  Lord  Cottenham  have  been  questioned  in 
Preston  v.  Liverpool,  Manchester,  $c.  Ry.  Co.?  Scottish 
North  Eastern  Ry.  Co.  v.  Stewart,5  Caledonian  Ry.  Co.  v. 

1  This  decision  has  been  severely  criticised  on  the  ground  that  a 
contract  of  the  nature  disclosed,  when  made  with  a  peer  or  other  legis- 
lator, is  opposed  to  public  policy.     The  decision,  said  Lord  Cranworth 
in  Preston  v.  Liverpool,  fyc.  Ry.  Co.,  5  H.  L.  C.  631,  "  made  everybody 
start  when  they  heard  it."    See  Green's  Brice's  Ultra  Vires,  2d  ed., 
581,  n.  A. 

2  3  My.  &  Cr.  773. 

8  Greenhalgh  v.  Manchester,  Sfc.  Ry.  Co.,  3  My.  &  Cr.  784. 
*  5  H.  L.  Cas.  605.  *  3  Macq.  282. 


EIGHTS  AND   LIABILITIES   OF  CORPORATION.  205 

Helenslurgh?  Earl  of  Shrewsbury  v.  North  Staffordshire 
Ry.  Co.2  On  the  other  hand,  their  principle  was  approved 
by  Page-Wood,  Y.  C.,  in  Earl  Lindsey  v.  Great  Northern 
Ry.  Co. ; 3  and  Mr.  Brice  in  his  work  on  Ultra  Vires,  sub- 
mits that  they  still  hold  good,  with  this  qualification,  that 
it  is  necessary  to  except  all  engagements  which  are  either 
ultra  vires  the  corporation,  or  mere  bribes  to  secure  the 
good  will  of  powerful  interests,  neither  of  which  can,  under 
any  circumstances,  be  enforced  against  the  corporation.4 

§  202.  Corporation  may  accept  or  adopt  contracts  made 
for  it  prior  to  its  creation.  —  While  a  corporation  cannot, 
according  to  the  weight  of  authority,  ratify  contracts  made 
in  its  name  or  behalf  before  it  has  acquired  life,  it  may, 
under  what  is  perhaps  the  prevailing  American  doctrine, 
exercise  its  power  to  make  contracts,  when  it  comes  into 
existence,  by  accepting  or  adopting  such  contracts.  There 
can  be  no  difference  in  this  respect,  it  is  said,  between  its 
making  a  contract  by  accepting  or  adopting  an  agreement 
originally  made  in  advance  for  it,  and  its  making  an 
entirely  new  contract.5  This  doctrine  seems  to  rest  on  the 
conception  that  the  original  contract  is  in  the  nature  of  a 

1  2  Macq.  391.  2  1  Eq.  593. 

»  10  Hare,  665.     See  also  Earl  Lindsey  v.  Capper,  3  H.  L.  C.  293. 

4  Green's  Brice's  Ultra  Vires,  2d  ed.,  584. 

6  Battelle  v.  Northwestern  Cement  if  Concrete  Pavement  Co.,  37  Minn. 
89;  Me  Arthur  v.  Times  Printing  Co.,  48  Minn.  319;  Pratt  v.  Oshkosh 
Match  Co.,  89  Wise.  406;  Queen  City  Furniture  §•  Carpet  Co.,  127  Mo. 
356;  Pittsburg  if  Tenn.  Copper  Co.  v.  Quintrell,  91  Tenn.  693;  Huron 
Printing  if  Binding  Co.  v'.  Kittleson,  4  So.  Dak.  520 ;  Gent  v.  Manu- 
facturers' Ins.  Co.,  107  111.  652;  Penn  Match  Co.  v.  Hapgood,  141 
Mass.  145;  Rogers  v.  New  York  fr  Texas  Land  Co.,  134  N.  Y."197; 
Boomer  v.  American  Spiral  Co.,  81  N.  Y.  468 ;  Swisshelm  v.  Swiss- 
vale  Laundry  Co.,  95  Penn.  367;  Morawetz  on  Corporations,  Sect. 
549  ;  Grand  River  Bridge  Co.  v.  Rollins,  13  Col.  4  ;  Schreyer  v.  Turner 
Flouring  Mills  Co.  (Or.),  43  Pac.  Rep.  719;  Weatherford  Mineral  Wells 
if  Northwestern  R.  R.  Co.  v.  Granger,  86  Tex.  350. 


206    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

continuing  proposal  which,  if , not  withdrawn,  the  corpora- 
tion upon  its  organization  may  accept.  An  offer  need  not 
be  made  to  an  ascertained  person ;  a  contract  results 
from  the  offer  when,  before  withdrawal,  it  is  accepted 
by  an  ascertained  person.1  If  acceptance  takes  place  be- 
fore withdrawal  of  the  offer,  there  is  then  a  meeting  of 
minds  resulting  in  a  mutual  contract.  Where  the  parties 
who  made  the  original  contract  intended  that  the  corpora- 
tion when  formed  should  become,  or  have  an  opportunity 
to  become,  a  party  to  it,  it  seems  entirely  reasonable  to 
treat  the  contract  as  constituting  or  including  an  offer  open 
to  the  corporation  to  accept,  if  it  sees  fit,  when  it  comes 
into  existence.2  If  there  is  such  acceptance,  it  amounts  in 
legal  effect,  to  the  making  of  a  new  contract,  the  validity 
and  operation  of  which  must  depend  upon  the  common  law 
rules  applicable  to  the  making  of  an  original  contract.3 

§  203.  Effect  of  such  adoption  or  acceptance.  —  Thus,  in 
Me  Arthur  v.  Times  Printing  Co.,*  the  promoters  of  the 
defendant  corporation,  which  was  formed  for  the  purpose 
of  publishing  a  newspaper,  prior  to  the  formation  of  the 
corporation  made  a  contract  with  the  plaintiff,  in  behalf  of 
the  contemplated  corporation,  for  his  services  as  an  adver- 
tising solicitor  for  the  period  of  one  year  from  October  1, 
1889,  the  date  at  which  it  was  expected  the  corporation 
would  be  organized.  The  corporation  was  not  in  fact 
organized  until  October  16th,  but  the  promoters  began  the 
publication  of  the  paper  on  October  1st,  and  the  plaintiff 
then  entered  upon  the  performance  of  his  duties  according 
to  the  requirements  of  the  contract,  and  continued  to  act 

1  Anson  on  Contracts,  35. 

2  Morawetz  on  Corporations,  Sect.  548. 

*  Me  Arthur  v.    Times  Printing  Co.,  48  Minn.  319 ;   Morawetz  on 
Corporations,  Sect.  549. 
4  48  Minn.  319. 


RIGHTS  AND   LIABILITIES   OF  CORPORATION.  207 

until  the  following  April,  when  he  was  discharged.  In  a 
suit  brought  by  him  against  the  corporation,  the  Statute  of 
Frauds  was  interposed  as  a  defence,  on  the  theory  that  the 
corporation  had  ratified  the  contract,  and  that,  the  ratifica- 
tion relating  back  to  the  time  when  it  was  made,  it  was  a 
contract  for  services  not  to  be  performed  in  one  year.  But 
the  court  held  that,  the  corporation  having  adopted  the 
contract  when  it  came  into  existence,  such  adoption  was 
in  legal  effect  the  making  of  a  new  contract  of  the  date  of 
the  adoption,  and  that  while  the  contract  made  by  the 
promoters  was  not  to  be  performed  within  one  year,  the 
new  contract  was  as  a  fact  to  be  performed  within  a  year, 
and  so  the  statute  was  not  applicable. 

§  204.  Acceptance  or  adoption  may  be  express.  —  The 
acceptance  or  adoption1  by  a  corporation  of  contracts 
made  in  its  name  and  for  its  benefit  prior  to  its  coming 
into  existence  may  be  formal  or  express.  Thus,  in  Pratt 
v.  Oshkosh  Match  Co.?  Jones  and  Wyman  were  copartners 
engaged  in  the  manufacture  and  sale  of  matches  under  the 
name  of  the  Oshkosh  Match  Company.  The  plaintiff  con- 
tracted with  the  partnership  to  deliver  to  it  a  specified 
number  of  feet  of  boards  at  a  stated  price.  Subsequently, 
Jones  informed  the  plaintiff  that  the  defendant  corporation 
was  to  be  formed  to  take  over  the  business  of  the  partner- 
ship, and  that  the  corporation  would  take  the  boards  ;  but 
that  owing  to  changes  in  the  business  which  would  arise 
from  the  incorporation,  certain  alterations  of  the  terms  of 
the  order  were  necessary.  The  plaintiff  agreed  to  the  al- 
terations, and  made  a  new  memorandum  of  sale  in  his  book. 
The  corporation  was  then  organized,  and  through  Jones  as 
its  agent  ordered  the  plaintiff  to  manufacture  the  boards 

1  The  terms   "adoption"  and  "acceptance"  seem  to  be  inter- 
changeably used  in  the  cases. 

2  89  Wise.  406. 


208        PROMOTERS   AND   PROMOTION  OF  CORPORATIONS. 

according  to  the  terms  of  the  agreement,  but  with  certain 
modifications.  This  the  plaintiff  did.  In  an  action  brought 
by  him  against  the  corporation  to  recover  the  purchase 
price  of  the  boards,  it  was  held  that  on  the  facts  stated  he 
was  entitled  to  recover. 

§  205.  In  Stanton  v.  New  York  &  Eastern  R.  R.  Co.,1  —  the 
promoters  of  a  railroad  corporation,  previous  to  its  in- 
corporation, entered  into  a  contract  with  the  plaintiff  in 
the  name  and  for  the  benefit  of  the  intended  corporation, 
by  the  terms  of  which  the  plaintiff  was  to  purchase  at  his 
own  expense  the  lands  necessary  for  the  location  of  the  pro- 
jected railroad,  and  to  convey  the  same  to  the  corporation 
when  formed,  and  the  corporation  was  to  pay  him  therefor 
by  the  transfer  of  a  stated  number  of  shares  of  its  capital 
stock.  The  corporation  was  organized,  and,  by  a  duly 
authorized  committee  of  its  directors,  executed  an  instru- 
ment in  writing  declaring  the  contract  in  question  to  be  "  a 
binding  contract  upon  the  parties."  The  plaintiff  devoted 
much  time,  both  before  and  after  the  organization  of  the  cor- 
poration, and  after  the  execution  of  the  instrument  referred 
to  in  carrying  out  his  part  of  the  contract,  but  the 
corporation  finally  abandoned  the  enterprise.  In  a  suit 
brought  against  the  corporation  by  the  plaintiff  to  recover 
for  his  services  under  the  contract,  it  was  held  that  he  was 
entitled  to  recover.  The  liability  of  the  corporation  is  put 
by  the  court  on  the  ground  of  ratification  of  the  contract ; 
but  the  facts  clearly  show  an  express  acceptance.2 

§  206.  Acceptance  or  adoption  by  corporation  may  be  in- 
ferred from  its  acts.  —  The  acceptance  or  adoption  may  be 
implied  from  the  acts  of  the  corporation,  — "  acts  from 

1  59  Conn.  272. 

2  See  also  Reichwald  v.  Commercial  Hotel  Co.,  106  111.  439;  Davis  v. 
Dexter  Butter  fr  Cheese  Co.,  52  Kan.  693;  McKnight  v.  Pittsburgh,  91 
Penii.  273;  Colorado  Land  #•  Water  Co.  v.  Adams,  5  Col.  App.  190. 


EIGHTS   AND   LIABILITIES   OF   COKPORATION.  209 

which  you  can  infer,  and  from  which  you  ought  to  infer," 
that  there  was  an  adoption  of  the  contract  by  the  corpora- 
tion after  its  formation.  This  may  be  inferred  from  the 
acceptance  by  the  corporation  of  property  directly  delivered 
to  it  by  the  other  party  to  the  contract,  or  received  from 
him  through  the  promoters,  to  whom  it  was  delivered  to  be 
turned  over  to  the  corporation  when  formed ;  or  it  may  be 
inferred  from  the  retention  by  the  corporation  of  the  ben- 
efit of  services  rendered  under  the  contract  subsequent,  or 
ordinarily  prior,  to  the  formation  of  the  corporation.1 

§  207.  Taking  benefit  of  contract  may  be  evidence  of  accept- 
ance or  adoption.  —  But  such  inference  is  not  necessarily  in 
all  cases  to  be  drawn  from  the  fact  that  the  corporation  has 
benefited  by  the  contract.  This  circumstance  is  no  more 
than  evidence  of  acceptance  or  adoption  of  the  contract. 
The  question  upon  which  the  liability  or  non-liability  of  the 
corporation  depends  is  not,  Has  the  corporation  had  the 
benefit  of  the  contract  ?  but,  Has  the  corporation  adopted 
the  contract  and  made  it  its  own  ?  If  the  contract  was  not 
made  in  the  name  of  the  intended  corporation,  but  was 
made  on  the  credit  of  the  promoter,  who  received  goods  or 
money  under  it,  which  he  subsequently  turned  over  to  the 
corporation  when  formed,  the  mere  acceptance  and  reten- 
tion of  the  goods  or  money  by  the  corporation  would  not 
amount  to  an  adoption  of  the  promoter's  contract.  The 
corporation  does  not  in  such  case  enter  into  any  contract, 
express  or  implied,  with  the  person  dealing  with  the  pro- 
moter, and  does  not  incur  any  obligation  towards  that  per- 
son, by  reason  of  the  circumstance  that  it  gets  the  benefit 
of  what  he  has  done.  The  principle  applicable  here  may  be 

1  Under  some  circumstances,  the  corporation  is  not  rendered  liable 
for  services  by  retaining  the  benefit  of  them.  See  discussion  of 
liability  of  corporation  to  pay  for  services  in  obtaining  subscriptions 
for  stock,  infra. 

14 


210    PKOMOTEKS  AND  PROMOTION  OF  CORPORATIONS. 

illustrated  by  a  decision  in  a  partnership  case.  In  Emly 
v.  Lye?  a  partner  drew  bills  in  his  own  name,  and  sent 
them  to  an  agent  of  the  firm  in  order  that  he  might  get 
them  discounted.  They  were  discounted,  and  the  money 
obtained  was  remitted  by  the  agent,  and  was  paid  to  the 
account  of  the  firm.  It  was  held  that  the  firm  was  neither 
liable  for  the  amount  of  the  bills  on  the  bills  themselves, 
nor  for  their  proceeds  on  the  common  counts.  There  was 
no  loan  to  the  partnership ;  no  contract  with  it ;  and  no 
liability  attached  to  the  firm  by  the  fact  that  the  partner 
who  alone  was  liable  had  applied  the  money  after  he  got  it 
for  the  benefit  of  his  copartners  as  well  as  for  the  benefit 
of  himself.2 

§  208.  Circumstances  under  which  taking  benefit  of  con- 
tract establishes  acceptance  or  adoption  of  contract.  —  When, 
however,  the  contract  is  made  in  the  name  or  in  behalf  of 
the  projected  corporation,  and  is  treated  as  a  proposal  to 
such  corporation,  to  be  acted  upon  by  it  when  it  comes  into 
existence,  then,  in  the  absence  of  other  controlling  circum- 
stances, acceptance  of  benefits  under  the  contract,  justi- 
fies the  inference  that  the  corporation  has  accepted  or 
adopted  it. 

§  209.  In  Battelle  v.  Northwestern  Cement  and  Concrete 
Pavement  Co.,3  the  plaintiff  with  two  other  persons  organ- 
ized the  defendant  corporation,  becoming  its  only  share- 
holders and  its  directors  and  officers.  Prior  to  the 
formation  of  the  corporation  it  was  agreed  that  certain 
property  belonging  to  the  plaintiff  should  be  transferred  by 
him  to  the  corporation,  when  formed,  and  that  in  consider- 
ation thereof  the  corporation  should  assume  and  pay  certain 
notes  which  the  plaintiff  had  given  in  payment  of  the  pur- 
chase price  of  the  property  when  he  acquired  it.  After  the 

1  15  East,  7.  2  1  Lindley  on  Partnership,  361. 

8  37  Minn.  89. 


I 

RIGHTS  AND   LIABILITIES   OF   CORPORATION.  211 

corporation  was  organized,  the  property  in  question  was 
transferred  by  the  plaintiff  to  it,  and  was  accepted  and 
used  by  it,  every  member  of  the  corporation  having  knowl- 
edge of  the  contract  under  which  the  corporation  ac- 
quired the  property.  It  was  held  that  the  corporation 
had  accepted  and  adopted  the  contract,  and  was  bound 
to  pay  the  notes  according  to  its  requirement.  "  It  is 
not  necessary,"  said  the  Court,  "  that  such  adoption  or 
acceptance  be  express,  but  it  may  be  inferred  from  acts 
or  acquiescence  on  the  part  of  the  corporation  or  its  author- 
ized agents,  as  a  similar  original  contract  might  be  shown." 
§  210.  In  Pittsburg  &  Tennessee  Copper  Co.  v.  Quintrell,1  — 
the  evidence  showed  that  one  of  the  incorporators  of  a 
mining  company  contracted  with  the  plaintiff  for  services 
before  the  application  for  incorporation  was  made ;  that 
after  the  formation  of  the  corporation,  he  sent  word  to  the 
plaintiff  to  report  for  work  ;  that  when  the  plaintiff  re- 
ported, some  one  else  had  been  employed  in  his  place,  but 
he  was  promised  work  if  he  would  wait ;  that  while  so  wait- 
ing he  was  told  by  the  president  of  the  corporation  that  he 
knew  of  the  contract,  and  was  surprised  not  to  find  him  at 
work  ;  that  later  he  was  given  work,  but  soon  after  was 
discharged  without  fault.  It  was  held  that  the  jury  were 
warranted  in  inferring  that  the  contract  between  the  plain- 
tiff and  the  projectors  of  the  corporation  had  been  adopted 
by  the  corporation  after  its  organization.2 

1  91  Tenn.  693. 

2  For  additional  illustrations,  see  Me  Arthurs.  Times  Printing  Co., 
48  Minn.  319;   Boomer  v.  American  Spiral  Co.,  81  N.  Y.  468;  Grand 
River  Bridge  Co.  v.  Rollins,  13  Col.  4;  Rogers  v.  New  York  fr  Texas 
Land  Co.,  134  N.  Y.  197;  Huron  Printing  Sf  Binding  Co.  v.  Kittleson, 
4  So.  Dak.  520;   Swisshelm  v.  Swissvale  Laundry  Co.,  95  Penn.  367; 
Schreyer  v.  Turner  Flouring  Mills  Co.  (Or.),  43  Pac.  Rep.  719;  Brown- 
ing v.  Great  Central  Mining  Co.,  5  H.  &  N.  856;  Frankfort  Sf  S.  T. 
Co.,  6  T.  B.  Monroe,  427. 


212    PEOMOTEES  AND  PROMOTION  OF  CORPORATIONS. 

§  211.  Acceptance  by  corporation  of  subscriptions  for  shares 
made  before  its  formation. — In  accordance  with  the  rule 
stated,  the  corporation  may  avail  itself  of  subscriptions  for 
shares  made  before  its  formation,  if  when  it  comes  into  exist- 
ence it  accepts  the  subscriptions,  either  expressly  by  formal 
acceptance  or  by  an  issue  of  a  certificate  to  the  subscriber, 
or  impliedly  by  acts  amounting  to  a  recognition  of  the  sub- 
scriber in  the  capacity  of  a  shareholder.  Although  the 
subscription  is  originally  in  the  nature  of  an  open  proposi- 
tion, yet  when  accepted  and  acted  on  by  the  corporation, 
before  the  subscriber  retracts  it,  the  right  to  revoke  is  lost, 
and  the  subscription  then  becomes  an  accepted  mutual 
contract,  binding  upon  both  the  subscriber  and  the  cor- 
poration.1 

§  212.  Cases  in  -which  term  "  ratification  "  used  in  sense  of 
adoption  or  acceptance.  —  There  are  cases  in  which  the  acts 

1  Hudson  Real  Estate  Co.  v.  Tower,  156  Mass.  82 ;  Athol  Music  Hall 
Co.  v.  Carey,  116  Mass.  471 ;  Richlieu  Hotel  Co.  v.  International  Military 
Encampment  Co. ,  140  111.  248 ;  Ashuelot  Boot  fr  Shoe  Co.  v.  Hoit,  56 
N.  H.  348;  Miller  v.  Wild  Cat  Gravel  Road  Co.,  52  Ind.  51;  Buffalo  fr 
Jamestown  R.  R.  Co.  v.  Gifford,  87  N.  Y.  294;  Peninsular  R.  R.  Co. 
v.  Duncan,  28  Mich.  130 ;  Penobscot  R.  R.  Co.  v.  Dummer,  40  Me. 
172;  Essex  Bridge  Co.  v.  Tuttle,  2  Vt.  393;  Sanger  v.  Upton,  91  U.  S. 
56;  Bell's  Appeal,  115  Perm.  88;  Mohan  v.  Wood,  44  Cal.  462; 
Starrett  v.  Rockland  Insurance  Co.,  65  Me.  374.  It  has  been  held  that 
where  the  subscription  does  not  purport  to  run  to  the  corporation, 
the  corporation  cannot  enforce  it.  Lake  Ontario  Shore  R.  R.  Co.  v. 
Curtis,  80  N.  Y.  219.  It  is  held  in  most  of  the  New  England  States, 
contrary  to  the  rule  in  other  jurisdictions,  that  the  corporation  can- 
not enforce  a  subscription  for  stock  unless  the  subscriber  has  expressly 
promised  to  pay,  or  the  charter  expressly  obliges  him  to  do  so ;  and 
there  are  cases  holding  that  the  subscription  once  made  is  irrevocable, 
and  in  itself  constitutes  a  contract  which  upon  the  formation  of  the 
corporation  becomes  binding.  For  a  review  of  the  law  on  these 
points,  and  a  citation  and  examination  of  the  decisions,  see  Thompson 
on  Corporations,  Sect.  1162  et  seq.  See  also  a  statement  of  the  law 
by  Professor  Collins  of  the  Cornell  University  Law  School,  quoted  in 
Cook  on  Stockholders,  3d  ed.,  Sect.  75. 


RIGHTS   AND  LIABILITIES   OF   CORPORATION.  213 

of  the  corporation  in  relation  to  contracts  made  for  it  be- 
fore its  formation  are  spoken  of,  inaccurately,  it  would  seem, 
as  ratification ;  but  the  facts  disclosed  in  most  of  these 
cases  bring  them  within  the  rule  stated  as  to  acceptance  or 
adoption.1  Two  cases  will  serve  as  illustrations.  In 
Oakes  v.  Cattaraugus  Water  Co.?  Cowan,  who  was  engaged 
in  organizing  a  water-works  company,  and  was  the  princi- 
pal promoter  of  the  enterprise,  in  the  name  of  the  intended 
corporation  entered  into  a  written  contract  with  the  plain- 
tiff to  pay  him  $1,000  for  his  services  in  securing  a  right  of 
way  and  in  other  matters  pertaining  to  the  proposed  water- 
works. The  company  was  thereafter  incorporated,  and 
Cowan  became  its  managing  agent,  and  had  full  direction 
and  charge  of  the  business.  The  water-works  were  con- 
structed, and  the  plaintiff,  at  the  request  of  Cowan,  ren- 
dered services  of  the  character  called  for  by  the  contract. 
It  was  held  that  it  was  fairly  within  the  powers  of  Cowan 
as  managing  agent  of  the  corporation  to  adopt  or  ratify  the 
contract,  and  that  if  he  intended  in  behalf  of  the  corpora- 
tion, by  calling  upon  the  plaintiff  to  do  the  things  which  he 
had  agreed  to  do  in  the  writing,  to  adopt  and  ratify  the 
agreement  made  before  the  incorporation,  instead  of  mak- 
ing a  new  one,  there  was  no  good  reason  why  the  corpora- 
tion should  not  become  bound  by  his  action,  and  that 
whether  or  not  this  was  his  intention  was  a  question  of 
fact.  In  a  dissenting  opinion,  Gray,  J.,  pointed  out  that 
there  could  be  no  ratification  of  the  contract,  because  it 
was  made  before  the  corporation  came  into  existence. 
Conceding  that  a  corporation  may  become  obligated  by  a 

1  Stanton  v.  New  York  fr  Eastern  R.  R.  Co.,  59  Conn.  272 ;  Rogers  v. 
New  York  §•  Texas  Land  Co.,  134  N.  Y.  197,  211 ;  Davis  v.  Montgomery 
Furnace  §•  Chemical  Co.,  8  So.  Rep.  496;   Whitney  v.   Wyman,  101 
U.  S.  392;    Grape  Sugar  fr  Vinegar  Mfg.  Co.  v.  Small,  40  Md.  395; 
Bruner  v.  Brown,  139  Ind.  600. 

2  143  N.  Y.  430. 


214        PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

contract  made  for  it  before  its  incorporation,  through  ac- 
ceptance or  adoption,  "  it  should  at  least  appear,"  he  said, 
"  in  order  to  justify  a  verdict  from  the  facts,  that  those 
facts  established  a  knowledge  by  its  agents  of  its  existence 
and  of  its  terms ;  or  that  the  benefits,  the  acceptance  of 
which  is  relied  upon  to  constitute  adoption,  were  of  that 
nature  as  to  presuppose  and  charge  the  company  or  its 
agents  with  knowledge  of  a  contract  with  the  person  from 
whom  derived."  But  in  his  opinion,  the  adoption  of  the 
contract  could  not  rest  in  implication  from  the  mere  state- 
ment or  acts  of  the  interested  party  who  made  it,  with  no 
evidence  to  show  any  knowledge  or  acquiescence  on  the 
part  of  any  other  officer  or  member  of  the  corporation.  It 
is  apparent  that  the  point  of  difference  between  the  majority 
and  minority  of  the  Court  in  this  case  was  the  authority  of 
Cowan  to  bind  the  corporation  by  his  acts.  Assuming  that 
he  had  the  requisite  authority,  it  was  on  the  facts  a  ques- 
tion of  name  and  not  of  substance  whether  his  acts  amounted 
to  a  ratification  or  to  an  acceptance  or  adoption  of  the  con- 
tract ;  and  in  the  majority  opinion,  it  is  said  that  "  in  this 
case  ratification  and  adoption  mean  the  same  thing." 

§  213.  In  Paxton  Cattle  Co.  v.  First  National  Bank  of 
Arrapahoe,1  —  the  promoters  of  the  Paxton  Cattle  Com- 
pany, after  executing  articles  of  incorporation,  but  before 
the  corporation  acquired  life  by  the  recording  of  the  arti- 
cles, caused  to  be  executed  and  delivered  to  one  Meserve, 
in  the  name  of  the  corporation,  a  note  in  consideration  of 
the  sale  and  in  payment  for  a  certain  ranch,  horses,  cattle, 
and  other  property,  which  after  the  corporation  came 
into  existence  were  delivered  to  and  retained  by  it,  the 
directors  and  officers  having  full  knowledge  of  the  facts  in 
relation  to  the  execution  of  the  note.  It  was  held  that  the 
assignee  of  Meserve  could  recover  against'  the  corporation 

1  21  Neb.  621. 


EIGHTS   AND  LIABILITIES   OF  COEPOEATION.  215 

on  the  note.  The  Court  said :  "  The  conclusion  is  inevi- 
table, granting  the  entire  want  of  power  on  the  part  of  the 
officers  and  promoters  of  the  corporation  to  act  as  such  at 
the  date  of  the  note,  that  the  retaining  possession  by  the 
corporation  after  its  organization  is  a  ratification  of  the 
contract  with  all  its  terms  and  obligations."  It  seems 
clear  on  the  facts  presented  by  this  case  that  there  was  a 
contract  by  the  corporation,  to  be  implied  from  its  acts,  to 
pay  the  note  according  to  its  terms. 

§  214.  Distinction  between  ratification  and  adoption  or  ac- 
ceptance. —  Possibly  in  some  of  the  cases  the  term  "  rati- 
fication "  is  employed,  not  in  its  strict  legal  sense,  but  to 
express  the  same  meaning  which  is  conveyed  by  the  terms 
"  adoption  "  and  "  acceptance."  It  must  be  admitted  how- 
ever, that,  while  in  perhaps  most  cases  it  is  a  question  not 
of  substance  but  of  name,  whether  the  act  obligating  the 
corporation  is  to  be  styled  ratification  or  adoption  or  ac- 
ceptance, the  question  may  in  some  circumstances  be  an 
important  one.  Under  the  theory  of  ratification,  the  con- 
tract is  deemed  to  have  been  valid  and  operative  from  its 
inception,  the  ratification  relating  back  to  the  moment 
when  the  contract  was  made  by  the  promoters.  Under  the 
theory  of  adoption  or  of  acceptance  of  a  continuing  offer, 
there  is  no  contract  until  there  have  been  such  acts  of 
adoption  or  acceptance  as  will  fix  the  rights  of  both  parties. 
In  cases  involving  a  defence  based  on  the  Statute  of  Limita- 
tions or  on  that  provision  of  the  Statute  of  Frauds  touching 
certain  contracts  not  to  be  performed  within  one  year,  the 
contract  might  be  enforceable  under  one  theory  and  un- 
enforceable under  the  other.1  This  would  also  be  true  in 
cases  where  the  corporation  sought  to  enforce  the  contract 
against  the  resistance  of  the  other  party  to  it.2 

1  See  Me  Arthur  v.  Times  Printing  Co.,  48  Minn.  319. 

2  Penn  Match  Co.  v.  Hapgood,  141  Mass.  145. 


216    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

§  215.  English  Doctrine.  —  The  English  doctrine  as  to 
promoter's  contracts  differs  from  those  stated,  in  that  the 
contract  is  not  treated  as  a  proposal,  subject,  at  any  time 
before  it  is  withdrawn,  to  acceptance  by  the  corporation 
when  it  comes  into  existence,  but,  on  the  contrary,  as  a 
contract  between  the  promoter  in  his  individual  capacity 
and  the  person  with  whom  he  deals,  to  which  the  corpora- 
tion cannot  become  a  party  by  adoption,  acceptance,  or  rat- 
ification. If  it  appears  that  the  promoter  and  the  other 
party  intended  to  enter  into  a  binding  contract,  they  must 
be  deemed  to  have  contracted  in  the  only  way  in  which 
they  could  lawfully  contract,  —  that  is,  with  each  other 
individually.  In  order  to  create  any  obligation  as  between 
the  corporation  and  the  party  with  whom  the  promoter 
has  contracted,  there  must  be  a  distinctly  new  contract 
made  between  them,  although  it  may  be  in  the  same 
terms  as  the  old  contract.  It  must  be  supported  by  a  new 
consideration.  The  retention  of  property  which  has  been 
handed  over  to  the  promoter  under  the  old  contract,  and 
by  him  delivered  to  the  corporation,  will  not  suffice.  The 
making  of  a  new  contract  will  not  be  inferred  from  the 
fact  alone  that  the  corporation  has  received  and  retained 
the  property.1  But  under  some  circumstances  the  corpora- 
tion may  become  liable  in  equity  to  pay  a  fair  compensation 
for  benefits  which  it  has  received.2  The  fact  that  a  new 
contract  has  been  made  may,  however,  be  inferred  from 
the  acts  of  the  parties. 

1  Kelner  v.  Baxter,  L.  R.  2  C.  P.  174;  Scott  v.  Ebury,  L.  R.  2  C.  P. 
255;   Gunn  v.  London  Sf  Lancashire  Ins.   Co.,  12  C.  B.  (N.  s.)  694; 
Melhado  v.  Porte  Allegre,  New  Hamburgh,  Sf  Brazilian  Ry.  Co.,  L.  R. 
9  C.  P.  503;    In  re  Northumberland  Hotel  Co.,  33  Ch.  D.  16.     The 
English  doctrine  has  apparently  met   with  favor  in   Massachusetts: 
Abbott  v.  Hapgood,  150  Mass.  252;  but  compare  Penn  Match   Co.  v. 
Hapgood,  141  Mass.  145.     See    Winters  v.  Hub  Mining  Co.,  57  Fed. 
Rep.  287. 

2  In  re  Empress  Engineering  Co.,  16  Ch.  D.  125. 


EIGHTS  AND   LIABILITIES   OF   CORPORATION.  217 

§  216.  In  Howard  v.  Patent  Ivory  Manufacturing  Co.,1  — 
Jordan  entered  into  an  agreement  with  Wysler,  who  pur- 
ported to  act  on  behalf  of  a  company  about  to  be  formed,  to 
sell  certain  property  to  the  projected  company.  The  com- 
pany was  formed  shortly  afterwards,  with  a  memorandum 
and  articles  of  association  containing  provisions  for  the 
adoption  of  the  agreement  by  the  directors  on  behalf  of  the 
company,  with  or  without  modification.  At  meetings  of 
the  directors  at  which  Jordan  was  present,  resolutions  were 
passed  adopting  the  agreement,  accepting  an  offer  of  Jordan 
to  take  payment  of  part  of  the  purchase  money  in  deben- 
tures instead  of  in  cash,  and  directing  that  the  seal  of  the 
company  should  be  affixed  to  an  assignment  by  Jordan  to 
the  company  of  leasehold  property  comprised  in  the  agree- 
ment, and  to  debentures  to  be  issued  to  Jordan.  The 
assignment  was  executed  by  Jordan,  and  sealed  by  the 
company ;  the  debentures  were  issued  to  him,  and  the 
company  took  possession  of  the  leaseholds  and  carried  on 
their  business  thereon.  The  company  was  afterwards 
wound  up,  and  the  liquidator  took  from  Jordan  an  assign- 
ment of  other  property  comprised  in  the  agreement.  In 
the  winding  up,  the  issue  was  raised  whether  the  deben- 
tures were  valid.  It  was  held  that  there  was  evidence  that 
a  contract  had  been  entered  into  by  the  company  with  Jor- 
dan to  the  effect  of  the  previous  agreement  as  subsequently 
modified  by  the  acceptance  of  debentures  instead  of  cash  ; 
that  there  was,  therefore,  at  the  time  when  the  debentures 
were  issued,  an  existing  debt  due  from  the  company,  and 
that  they  were  consequently  validly  issued.  Kay,  J.,  in  his 
judgment,  quotes  the  language  of  Turner,  L.  J.,  in  Wilson 
v.  West  Hartlepool  Ry.  Co.,2  that "  there  is  authority  for  say- 
ing that  in  the  eye  of  this  Court  it  is  a  fraud  to  set  up  the  ab- 
sence of  agreement  when  possession  has  been  given  upon  the 
1  38  Ch.  D.  156.  3  2  De  G.,  J.  &  Sm.  475. 


218    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

faith  of  it;"  and  that  "where  possession  has  been  given 
upon  the  faith  of  an  agreement,  it  is  the  duty  of  the  Court, 
as  far  as  it  is  possible  to  do  so,  to  ascertain  the  terms  of  the 
agreement,  and  to  give  effect  to  it."  He  also  quotes  Sir 
George  Jessel,  who  said  in  In  re  Empress  Engineering  Co.J- 
that  the  contract  between  the  promoters  and  the  so-called 
agent  for  the  company  was  not  a  contract  binding  upon  the 
company,  nor  could  it  become  binding  upon  it  by  ratifica- 
tion ;  but  that  "  it  does  not  follow  from  that  that  acts  may 
not  be  done  by  the  company  after  its  formation  which  make 
a  new  contract  to  the  same  effect  as  the  old  one." 

§  217.  Corporation  cannot  adopt  or  accept  ultra  vires  con- 
tracts. —  In  stating  that  a  corporation  may  adopt  or  accept 
a  contract  made  in  its  behalf  by  its  promoters  prior  to  its 
creation,  contracts  which  are  ultra  vires  the  corporation 
must  of  course  be  excluded.  And  here  a  suggestion  made 
by  Mr.  Taylor  seems  worthy  of  consideration,  namely,  that 
it  may  be  ultra  vires  for  a  corporation  to  adopt  acts  done 
before  its  formation,  although  the  acts  are  of  the  same 
nature  as  those  which  the  corporation  was  formed  to  do. 
"  The  true  test,"  says  Mr.  Taylor,  "  by  which  to  determine 
whether  the  adoption  of  a  given  contract  is  ultra  vires  the 
corporation  is,  not,  Would  the  contract  in  question  have 
been  within  the  powers  of  the  corporation  had  it  been 
organized  when  the  contract  was  made  ?  but,  Is  it  within  the 
powers  of  the  corporation  to  make  the  same  contract  now, 
supposing  it  had  not  been  made  then  ?  or,  Can  the  company 
legally  carry  out  that  very  contract  ?  To  illustrate,  sup- 
pose certain  persons,  with  a  view  of  forming  an  insurance 
company,  and  wishing  to  find  out  for  certain  how  much 
business  a  company  would  get  from  the  beginning,  go 
about  making  contracts  of  insurance  on  behalf  of  the 
future  company,  the  insurance  to  begin  at  a  point  of  time 

i  16  Ch.  D.  at  p.  128. 


EIGHTS   AND  LIABILITIES   OF  COKPOKATION.  219 

anterior  to  the  formation  of  the  company ;  the  company 
is  afterwards  organized.  These  were  contracts  which  the 
company  could  legally  have  made  had  it  been  organized  at 
the  time ;  yet  it  seems  doubtful  whether  the  company 
could  assume  those  contracts  so  as  to  render  itself  liable 
for  losses  which  occurred  before  it  was  organized.  If  the 
promoters  had  contracted  that  the  company  should  insure, 
the  insurance  to  begin  with  the  formation  of  the  company, 
in  that  case  the  company  could  have  adopted  and  ratified 
the  contracts,  for,  after  its  organization,  it  could  legally 
have  made  those  very  contracts."  *  The  test  proposed  seems 
sound,  but  the  apparent  assumption  as  to  the  law  in  the 
case,  put  by  way  of  illustration,  would  seem  to  be  too  broad. 
The  company  could  not  ratify  the  contract,  because  it  was 
not  in  existence  when  the  contract  was  made.  On  the 
theory  of  adoption  or  acceptance  of  the  contract  treated  as 
a  continuing  offer,  the  contract  could  acquire  validity  only 
as  of  the  date  of  adoption  or  acceptance,  and  at  that  date 
the  subject-matter  of  the  insurance  not  being  in  existence, 
the  contract  would  be  ultra  vires  the  company,  if  the  truth 
as  to  the  non-existence  of  the  thing  insured  were  known 
to  the  company.  But  an  insurance  company  has  power  to 
make  a  retrospective  contract  of  insurance,  and  the  policy 
may  by  its  terms  relate  back  so  as  to  cover  a  loss  which 
happened  anterior  to  the  date  of  the  policy.2  An  insurance 
company  might  issue  a  policy  of  insurance  on  a  vessel  which 
some  months  prior  thereto  had  sailed  on  a  whaling  voyage 
to  the  Pacific  Ocean.  If  the  policy  were  written  to  cover 
a  loss  during  the  entire  voyage,  it  is  not  conceived  that,  in 
the  absence  of  misrepresentation  or  concealment,  the  fact 
that  the  loss  occurred  prior  to  the  formation  of  the  insur- 
ance company  would  constitute  a  defence  to  a  suit  on 

1  Taylor  on  Corporations,  2d  ed.,  p.  87,  note. 
3  Paddock  v.  Franklin  Ins.  Co.,  11  Pick.  227. 


220        PKOMOTERS  AND   PROMOTION  OF   CORPORATIONS. 

the  policy.  The  company  could,  therefore,  in  the  case  put 
by  Mr.  Taylor,  have  made  the  very  contract  stated  by  him, 
and  having  the  power  to  make  it,  it  follows  that  it  would 
have  the  power  to  adopt  such  a  contract  made  in  advance 
for  it,  provided  that  it  did  not  know  that  the  loss  to  be  in- 
sured against  had  already  occurred. 


ARTICLE  II.  —  LIABILITY  OF  CORPORATION  TO  PAY  ITS  PRO- 
MOTERS, OR  PERSONS  EMPLOYED  BY  THEM,  FOR  SERVICES  AND 
EXPENSES  INCIDENT  TO  ITS  FORMATION. 


§  218.    Statutory  liability. 

219.  Liability  under  the  English 

Companies  Acts. 

220.  Melhado   v.   Porte  Allegre, 

New  Hamburgh.  &  Brazil- 
ian Ry.  Co.,  L.  R.  9  C.  P. 
503. 

221.  Liability  on  quantum  meruit. 


§  222.  Doctrines  held  in  this  coun- 
try as  to  liability  of  corpo- 
ration. 

223.  Liability  to  pay  for  services 

and  expenses  in  obtaining 
subscriptions  for  shares. 

224.  Doctrine   held   in   Vermont 

and  New  Hampshire. 


§  218 .  Statutory  liability.  —  In  the  case  of  corporations 
created  by  a  special  act  of  the  legislature,  the  act  some- 
times contains  a  clause  that  the  expenses,  costs,  and 
charges  incidental  and  preparatory  to  the  formation  of 
the  corporation  shall  be  paid  by  the  corporation  after  it  is 
organized.  This  creates  a  legal  liability  on  the  part  of  the 
corporation  to  pay  the  proper  expenses  of  obtaining  its 
charter.  It  enables  the  promoters  who  have  performed 
necessary  services,  or  incurred  proper  expenses,  in  the 
work  of  formation,  to  recover  from  the  corporation. 
There  is  in  such  cases  a  statutory  obligation  of  which 
the  person  named  can  take  the  benefit,  —  an  action  for 
debt  on  a  statute  being  a  well  known  old  form  of  action 
at  common  law.1  But  those  only  who  are  acting  directly 
for  the  proposed  corporation,  and  who  have  no  other  pay- 


1  Per  Lindley,  J.,  in  In  re  Rotherham  Alum  §•  Chemical  Co.,  25  Ch. 
D.  at  p.  Ill ;  Scott  v.  Lord  Ebury,  L.  R.  2  C.  P.  at  p.  264. 


EIGHTS  AND  LIABILITIES   OF  CORPORATION.  221 

master  to  look  to,  are  entitled  to  recover  payment  from  the 
corporation  when  it  is  formed.  Those  who  are  employed  by 
any  other  person  for  hire  or  reward  to  do  the  work  must 
look  for  payment  to  the  person  who  employed  them.1 

§  219.  Liability  under  English  Companies  Acts.  —  The 
power,  without  imposition  of  liability,  to  pay  for  such 
services  and  expenses  may  be  given  to  the  corporation 
by  statute.  Thus,  in  the  English  Companies  Acts,  it  is 
provided  that  the  directors  "  may  pay  all  expenses  incurred 
in  getting  up  and  registering  the  company."  2  In  cases 
arising  under  those  acts,  it  has  been  held  that  the  fact 
of  incorporation  does  not  entail  upon  the  corporation  a 
liability  at  law  to  pay  for  these  preliminary  services  and 
expenses.  The  corporation,  having  the  power,  may  of 
course  pay  them  if  it  sees  fit  to  do  so;  but  a  provision 
in  the  articles  of  association  that  the  corporation  shall 
pay  or  shall  adopt  an  agreement  for  payment  for  services 
to  be  rendered  in  the  formation  of  the  corporation  is  not 
enforceable  against  the  corporation,  for  it  cannot  be  taken 
advantage  of  by  an  outsider,  nor  by  a  member  to  secure 
benefits  outside  his  rights  as  a  member.3 

§  220.  In  Melhado  v.  Porte  Allegre,  New  Hamburgh,  & 
Brazilian  Ry.  Co.,4  —  it  was  held  that  promoters  who  have 
incurred  necessary  preliminary  expenses  in  the  establish- 
ment of  the  company,  cannot  recover  the  same  from  the 
company.  Lord  Coleridge,  stating  that  he  had  reluctantly 
come  to  the  conclusion  that  no  such  action  would  lie, 

1  In  re  Skegnors  $•  St.  Leonards  Tramway  Co.,  58  L.  J.  Ch.  737,  in 
which  the  cases  on  the  subject  are  cited  and  considered. 

8  Companies  Act,  1862,  Table  A,  paragraph  55. 

8  In  re  Rotherham  Alum  fr  Chemical  Co.,  25  Ch.  D.  103;  Melhado  v. 
Porte  Allegre,  New  Hamburgh,  fr  Brazilian  Ry.  Co.,  L.  R.  9  C.  P.  503; 
Browne  v.  La  Trinidad,  37  Ch.  D.  1;  Eley  v.  Positive  Assurance  Co.,  1 
Ex.  D.  88. 

4  L.  R.  9  C.  P.  503. 


222    PKOMOTEES  AND  PROMOTION  OF  CORPORATIONS. 

observed:  "It  does  seem  just,  in  general,  if  a  company 
takes  the  benefit  of  the  work  and  expenditure  by  which 
its  existence  has  been  rendered  possible,  and  voluntarily 
comes  into  existence  on  the  terms  that  it  shall  be  liable  to 
pay  for  such  work  and  expenditures,  that  a  cause  of  action 
should  be  given.  I  can  find,  however,  no  legal  principle 
upon  which  such  an  action  can  be  maintained.  It  appears 
to  me  that  there  is  no  contract  between  the  plaintiffs  and 
the  defendant.  The  doctrine  of  ratification  is  inappli- 
cable, for  the  reasons  given  in  the  judgment  in  Kelner  v. 
Baxter." l 

§  221.  Liability  on  quantum  memit.  —  The  corporation, 
it  has  been  held,  however,  may  be  liable  in  equity  on  a 
quantum  meruit.2  This  enables  the  promoters  or  persons 
employed  by  the  promoters,  and  looking  exclusively  to  the 
projected  corporation  for  payment,  to  recover  from  the 
corporation  fair  compensation  for  services  rendered  and  ex- 
penses incurred  in  bringing  it  into  existence.  But  when 
persons  perform  work  for  the  promoters  in  the  formation  of 
the  corporation,  for  payment  of  which  they  look  to  the  pro- 
moters, they  cannot  afterwards  hold  the  corporation  on 
the  ground  that  it  has  had  the  benefit  of  their  work.  As  a 
general  rule,  it  is  inequitable  for  a  person  not  to  pay  for 
the  services  of  which  he  has  taken  the  benefit ;  but  this  is 
not  true  when  the  work  was  done  for  a  third  party  dealing 
with  such  person.  Thus,  in  In  re  Rotlierham  Alum  $ 
Chemical  Co.,3  Mycrofts  promoted  a  company  in  order  that 
he  might  sell  certain  property  to  it.  He  employed  Pease 
as  a  solicitor  in  its  formation,  and  Pease,  on  Mycroft's 
retainer,  rendered  necessary  services  in  the  incorporation 

1  L.  R.  2  C.  P.  174. 

2  In  re  Hereford  Sf  South  Wales  Wagon  Co.,  2  Ch.  D.  621  ;  In  re 
Empress  Engineering  Co.,  16  Ch.  D.  125. 

3  25  Ch.  D.  103. 


EIGHTS   AND   LIABILITIES   OF   CORPOKATION.  223 

of  the  company.  In  the  winding  up,  Pease  presented  a 
claim  for  services  as  solicitor,  which  was  disallowed  as  to 
all  items  incurred  before  the  formation  of  the  company,  it 
not  appearing  that  the  company  had  agreed  to  pay  them. 
It  having  been  contended  that  the  company  was  liable  on 
the  ground,  among  others,  that  it  had  taken  the  benefit  of 
the  services,  Lindley,  L.  J.,  observed:  "It  is  said  that  Mr. 
Pease  has  an  equity  against  the  company  because  the  com- 
pany has  had  the  benefit  of  his  labor.  What  does  that 
mean  ?  If  I  order  a  coat  and  receive  it,  I  get  the  benefit 
of  the  labor  of  the  cloth  manufacturer ;  but  does  any  one 
dream  that  I  am  under  any  liability  to  him  ?  It  is  a  mere 
fallacy  to  say  that  because  a  person  gets  the  benefit  of 
work  done  for  somebody  else  he  is  liable  to  pay  the  person 
who  did  the  work."  1 

222.  Doctrines  held  in  this  country  as  to  liability  of  cor- 
poration. —  In  this  country,  so  far  as  the  corporation  is 
concerned,  in  the  absence  of  statutory  obligation,  there  is 
some  authority  for  the  proposition  that  services  rendered 
or  expenditures  made  in  bringing  the  corporation  into 
existence  are  to  be  taken  as  voluntary,  no  promise  by  the 
corporation  to  pay  for  them  being  implied  from  acceptance 
of  the  benefit  by  the  corporation,  or  created  by  any  contract 
made  by  the  promoters  in  the  name  of  the  intended  corpora- 
tion.2 But  the  subject  has  not  received  much  consideration. 
The  doctrine  has  been  put  forward  in  Pennsylvania,  that 
the  corporation,  when  formed,  is  liable  for  services  ren- 
dered or  money  expended  in  procuring  the  charter,  pro- 
vided such  services  were  rendered  or  expense  incurred 
under  an  agreement  for  payment  authorized  by  a  majority 

1  See  also  Perry  v.  Little  Rock  fr  W.  S.  R.  Co.,  44  Ark.  383,  395. 

2  Taylor  on  Corporations,   Sect.  86;   Bishop  on  Contracts,   Sect. 
221;  Hall  v.  Vermont  §•  Mass.  R.  R.  Co.,  28  Vt.  401;  Marchand  v. 
Loan  §•  Pledge  Association,  26  La.  Ann.  389. 


224        PEOMOTEES   AND   PEOMOTION   OF   COEPOEATIONS. 

of  the  persons  associated  together  for  incorporation.1  The 
theory  seems  to  be  that  the  corporation,  by  taking  the 
benefit  of  the  agreement  made  by  its  corporators  or  pro- 
moters, thereby  ratifies  the  agreement.  But,  as  has  been 
observed  by  a  learned  writer,  if  the  corporation  ratifies 
the  agreement,  it  is  not  a  case  of  being  bound  by  the 
act  of  a  majority  of  the  promoters  or  corporators.2  In 
Kentucky,  the  same  conclusion  has  been  reached  as  in 
Pennsylvania,  but  on  the  theory  of  estoppel,  instead  of  that 
of  ratification.  In  Morton  v.  Hamilton  College?  the  pro- 
moters of  an  incorporated  college  assumed  an  obligation  to 
pay  the  interest  on  a  subscription  to  a  fund  for  the  pur- 
chase of  property  for  the  college.  It  was  necessary  to  do 
this  in  order  to  obtain  the  subscription,  and  it  was  done  at 
the  request  of  some  and  with  the  consent  of  all  of  those 
who  constituted  a  committee  to  organize  the  college  and 
raise  the  necessary  moneys,  and  with  the  understanding 
that  the  corporation,  when  formed,  should  save  the  pro- 
moters harmless.  In  an  action  brought  by  the  promoters 
against  the  corporation  to  recover  the  amount  of  interest 
which  they  had  been  compelled  to  pay,  and  which  went 
into  the  fund  used  in  buying  the  college  property,  it  was 
held  that  the  corporation  was  estopped  from  claiming  that 
the  committee  had  no  power  to  bind  it  by  an  agreement 
made  prior  to  its  coming  into  existence. 

The  question  of  the  power  of  a  private  corporation,  in  the 
absence  of  provision  therefor  in  the  enabling  act,  to  devote 
any  of  its  funds  to  paying  for  the  preliminary  services  and 
expenditures  incident  to  its  formation,  does  not  seem  to 

1  Bell's  Gap  R.  R.  Co.  v.  Christie,  79  Penn.  54;  Tift  v.  Quaker  City 
Nat.  Bank,  141  Penn.  550. 

2  Promoters'   Contracts,  by  Austin  Abbott,  in   1   Amer.    &  Eng. 
Corp.  Cas.,  Anno.  1. 

*  38  S.  W.  Rep.  1. 


EIGHTS  AND   LIABILITIES   OF   CORPORATION.  225 

have  been  raised  in  any  of  the  cases.  But  it  has  been  held 
that  a  town  has  no  authority  to  appropriate  money  for  the 
payment  of  expenses  incurred  by  individuals,  prior  to  its 
corporate  existence  as  a  town,  in  procuring  the  passage  of 
its  act  of  incorporation,  the  act  not  authorizing  the  pay- 
ment of  such  expenses.1  If  the  corporation  has  power  to 
pay  for  the  services  and  expenses  necessary  to  bring  it  into 
existence,  and  actively  takes  the  benefit  of  such  services 
and  expenditures  by  entering  upon  the  corporate  enter- 
prise, and  if  as  a  fact  the  work  was  not  done  or  the  expense 
incurred  gratuitously,  or  upon  the  credit  of  a  third  party, 
but  with  the  expectation  that  the  corporation,  when  formed, 
would  make  payment,  it  would  seem  that  the  corporation, 
ought  in  equity  to  be  holden  for  payment  to  a  fair  and 
reasonable  amount.2 

§  223.  Liability  to  pay  for  services  and  expenses  in  obtain- 
ing subscriptions  for  shares.  —  While  it  seems  just  that  the 
corporation  should  reimburse  those  persons  who  have  paid 
the  necessary  and  reasonable  expenses  of  its  creation,  ser- 
vices performed  or  expenditures  made  in  procuring  sub- 
scriptions for  stock  ordinarily  stand  on  a  different  footing. 
In  some  cases,  it  is  true,  as  under  the  National  Banking 
Act,  that  the  subscription  of  the  capital  stock  is  a  condi- 
tion precedent  to  the  existence  of  the  corporation.  But  in 
many  cases  the  procurement  of  subscriptions  may  follow 
the  organization  of  the  corporation  after  it  comes  into 
existence.  As  applied  and  limited  to  the  latter  cases,  the 
doctrine  held  by  some  courts  would  seem  to  be  sound, 
namely,  that  if  expense  is  to  be  incurred  by  the  corporation 
in  obtaining  subscriptions  for  its  stock,  it  should  only  be 
by  the  authority  of  its  duly  constituted  officers.3  "  It  is 

1  Frost  v.  Belmont,  6  Allen,  152. 

2  In  re  Hereford  v.  So.  Wales   Wagon  Co.,  2   Ch.   D.   621  ;   In  re 
Empress  Engineering  Co.,  16  Ch.  D.  125. 

8  Rockford,  Rock  Island,  if  St.  Louis  R.  R.  Co.  v.  Sage,  65  111.  328; 

15 


226         PROMOTERS   AND   PROMOTION   OF   CORPORATIONS. 

soon  enough,"  it  has  been  said,  "  for  corporate  bodies  to 
enter  into  contracts  encumbering  their  property,  when  they 
are  duly  organized  according  to  their  charters,  and  have 
their  chosen  and  impartial  directors  to  conduct  their1  busi- 
ness." 1  To  bring  a  corporation  into  existence,  the  promot- 
ers must  necessarily  take  action;  but  there  is  no  reason 
in  the  cases  referred  to  why  the  promoters  should  be  per- 
mitted to  usurp  the  power  of  the  directors  to  determine  what 
expense  shall  be  incurred  in  procuring  subscriptions  for  the 
capital  stock  ;  and  that  is  in  effect  what  it  comes  to  if  the 
directors  cannot  accept  subscriptions  which  have  been  influ- 
enced by  the  promoters,  or  by  persons  employed  by  the  pro- 
moters, without  thereby  placing  the  corporation  under  obli- 
gation to  pay  such  persons  or  the  promoters  for  their  services. 
§  224.  Doctrine  held  in  Vermont  and  New  Hampshire.  — 
Contrary  to  this  view,  it  has  been  held  in  Vermont  and 
New  Hampshire  that  when  the  promoters  of  a  corporation 
have,  after  its  charter  but  prior  to  its  organization,  agreed 
with  a  person  that  he  shall  be  paid  by  the  corporation  for 
his  services  in  obtaining  subscriptions  for  shares,  and  sub- 
scriptions are  thus  procured,  which  are  accepted  by  the 
corporation,  the  benefits  must  be  taken  cum  onere,  and  the 
corporation  is  liable  to  pay  for  the  services  rendered  ac- 
cording to  the  contract.2  This  view  has  been  much  criti- 
cised. Judge  Red  field  refers  to  it  "  as  of  too  great  laxity 
and  too  susceptible  of  abuse  to  afford  a  safe  guide  in  these 
lax  times,  when  every  possible  avenue  to  corruption  is  sure 
to  find  some  one  desperate  to  enter."  3  May  it  not  also  be 
said  that  it  rests  upon  a  fallacy  ?  The  theory  is  that  all 

New  York  $  New  Haven  R.  R.  Co.  v.  Ketchum,  27  Conn.  170 ;  Western 
Screw  fr  Mfg.  Co.  v.  Cousley,  72  111.  531 ;  Stove  v.  Flagg,  72  111.  397  ; 
Franklin  Ins.  Co.  v.  Hart,  31  Md.  59. 

1  New  York  $•  New  Haven  R.  R.  Co.  v.  Ketchum,  27  Conn.  170. 

2  Low  v.   Conn.  Sf  Passumpsic  R.  R.  Co.,  45  N.  H.  370;    Hall  v. 
Vermont  fr  Masxachuxetts  R.  R.  Co.,  28  Vt.  401. 

8  1  Redfield  on  Railways,  Sect.  14,  note. 


EIGHTS   AND   LIABILITIES   OF   CORPORATION.  227 

burdens  must  be  taken  with  the  benefit.  But  this  is  not 
always  true.  In  receiving  and  accepting  a  subscription  for 
shares,  the  corporation  deals  solely  with  the  subscriber. 
It  takes  his  money  and  delivers  to  him  therefor  a  certifi- 
cate of  membership.  Clearly  the  corporation,  not  being 
bound  by  the  contracts  of  its  promoters,  has  a  right  to 
deal  with  any  person  who  may  come  forward  as  a  sub- 
scriber, unhampered  by  any  terms  save  those  agreed  upon 
between  it  and  the  subscriber.  It  may  get  the  benefit  of 
labor  performed  by  some  third  person  in  inducing  the  sub- 
scriber to  apply  to  the  corporation  for  shares.  But  that 
person,  in  the  absence  of  employment  or  authority  or  an 
agreement  for  payment  by  the  corporation,  has  no  more 
right  to  claim  payment  from  the  corporation  than  has  the 
manufacturer  who  has  furnished  cloth  to  a  tailor  to  claim 
payment  for  his  cloth  from  a  person  buying  a  coat  from 
the  tailor.  The  purchaser  of  the  coat  gets  the  benefit  of 
the  labor  of  the  cloth  manufacturer,  yet  no  one  would 
claim  that  its  acceptance  rendered  him  liable  therefor  to 
the  manufacturer.  By  accepting  the  coat,  he  becomes 
liable  merely  to  pay  the  purchase  price  to  the  tailor.  The 
corporation,  by  accepting  a  subscription  becomes  bound  to 
admit  the  subscriber  to  membership,  and  that  is  all.  In 
these  cases  there  is  no  privity  of  contract  save  between  the 
contracting  parties.  The  third  party  is  not  brought  into 
privity  by  the  acceptance  of  the  subscription  in  the  one 
case,  or  by  the  acceptance  of  the  coat  in  the  other.  If  A. 
without  authority,  in  the  name  and  for  the  benefit  of  B., 
orders  goods  of  C.,  acceptance  of  the  goods  by  B.  is  a  rati- 
fication or  adoption  of  the  contract  to  pay  C.  for  them,  but 
it  is  not  a  ratification  or  adoption  of  an  unauthorized  agree- 
ment made  by  a  stranger  to  B.  that  B.  shall  pay  A.  for  his 
trouble  in  the  matter.1 

1  See    Weatherford  Mineral    Wells   Sf   Northwestern  R,   R.  Co.   v. 
Granger,  86  Tex.  350. 


228        PKOMOTERS   AND   PROMOTION   OF  CORPORATIONS. 


CHAPTER  XL 


RIGHTS  AND  LIABILITIES  OP  PROMOTERS  UNDER  CONTRACTS 
MADE  BY  THEM,  OR  BY  THEIR  CO-PROMOTERS,  IN  BEHALF 
OF  OR  FOR  THE  BENEFIT  OF  A  PROJECTED  CORPORATION. 
—  CONTRACTS  BETWEEN  PROMOTERS. 


I  225.  Promoter  not  liable  on  con- 
tract made  in  name  of  in- 
tended corporation,  unless 
he  agreed  to  be  so. 

226.  Presumption  as  to  intent  of 

parties. 

227.  Landman  v.  Entwistle,  7  Ex. 

632. 

228.  On  written  contract  question 

of  intent  is  for  the  Court. 
—  Kelner  v.  Baxter,  L.  U. 
2  C.  P.  174. 

229.  Scott  v.  Ebury,  L.  R.  2  C.  P. 

255. 

230.  Promoter  usually  not  liable 

on  contract  made  in  name 
of  corporation.  —  Liable 
for  misrepresentation  as  to 
existence  of  corporation. 

231.  Effect  of  adoption  by  corpo- 

ration of  contract  on  which 
credit  was  given  to  pro- 
moter. 

232.  Abbott    v.     Hapgood,     150 

Mass.  248. 

233.  Promoters    not   prima  facie 

partners. 

234.  English  cases  as  to  liability 

of  promoters  on  contracts 
made  by  co-promoters. 

235.  Ordinarily  promoter  not  li- 

able from  allowing  his 
name  to  appear  in  pro- 
spectus or  signing  articles 
of  incorporation,  if  he  does 
not  act  in  undertaking. 

236.  Statements  in  prospectus  in 

which  promoter  allows  his 
name  to  be  used  may  im- 
pose liability  upon  him. 


§  237.  When  promoter  has  acted  in 
undertaking,  question  for 
jury  whether  he  has  au- 
thorized co-promoters  to 
bind  him. 

238.  Riley  v.  Packington,  L.  R. 

2  C.  P.  536. 

239.  Promoter's  liability  on  con- 

tract made  before  he  be- 
came a  promoter.  —  Effect 
of  admission  of  liability. 

240.  To    hold    promoter,    credit 

must  have  been  given  to 
him. 

241.  Joint  liability  of  promoters. 

—  Effect  of  release  of  one. 

242.  Right  of  promoter  to  indem- 

nity from  co-promoters. 

243.  Right  of  promoter  to  contri- 

bution from  co-promoters. 

244.  Batard  v.  Hawes,  2  El.  &  B. 

287. 

245.  In    absence  of    agreement, 

promoter  cannot  enforce 
payment  for  services  from 
co-promoters. 

246.  No    contract    between    pro- 

moters to  go  forward  im- 
plied from  their  association 
together. 

247.  Legality  of  agreements  be- 

tween promoters  as  to 
formation  of  corporation 
and  its  future  management 
and  control. 

248.  Agreement  between  promo- 

ters restricting  sale  of 
their  stock. 


EIGHTS  AND   LIABILITIES   OF  PROMOTERS.  229 

§  225.  Promoter  not  liable  on  contract  made  in  name  of 
intended  corporation  unless  he  agreed  to  be  so.  —  As  the 
promoter  in  contracting  in  the  name  and  in  behalf  of 
the  intended  corporation  assumes  to  act  as  its  agent, 
the  rules  applicable  to  persons  who  contract  professedly 
as  agents  must  be  followed  in  determining  the  rights 
and  liabilities  of  the  promoter  under  such  a  contract. 
According  to  the  weight  of  argument  and  authority,  one 
who  is  known  to  be  professedly  or  really  acting  as  an 
agent,  and  who  discloses  his  real  or  avowed  principal,  and 
contracts  in  the  name  of  such  principal,  cannot,  although 
he  acts  without  authority,  or  has  no  principal,  be  made 
liable  on  the  contract  unless  he  expressly  or  impliedly 
agreed  to  be  so.1  Whether  he  is  to  be  personally  bound 
on  the  contract  is  always  a  question  of  the  intention  and 
understanding  of  the  parties.  The  fact  that  a  binding 
contract  does  not  result,  because  it  turns  out  that  the 
professed  agent  has  no  principal  who  can  be  holden,  as 
was  contemplated,  is  not  a  reason  for  the  creation  by 
judicial  construction  of  a  different  contract  which  neither 
of  the  parties  intended  to  make.2 

§  226.  Presumption  as  to  intent  of  parties.  —  The  pre- 
sumption is  that  one  contracting  avowedly  as  an  agent 
for  a  principal  competent  to  act  does  not  intend  and  is 
not  taken  to  bind  himself.  But  when  one  assumes  to 
represent  a  principal  who  has  no  legal  existence  or  status, 

1  Howard  v.  Yunker,  83  111.208;  Hersey  v.  Tully  (Col.   1896),  44 
Pac.  Rep.  854;  Johnson  v.  Smith,  21  Conn.  627;  Hall  v.  Crandall,  29  Cal. 
567;  Stetson  v.  Patten,  2  Me.  358;  Weare  v.  Gove,  44  N.  H.  196;  White 
v.  Madison,   26  N.  Y.   117;  Cole  v.   O'Brien,  34   Neb.  68;  Farmers' 
Cooperative  Trust  Co.  v.  Floyd,  47  Ohio  St.  525 ;  Me  Curdy  v.  Rogers,  21 
Wise.  199  ;  Randall  v.  Taimen,  18  C.  B.  793.     Contra:  Terwilliger  v. 
Murphy,  104  Ind.  32;  Andrew  v.  Tetlford,  37  Iowa,  314;  Solomon  v. 
Penoyer,  89  Mich.   11 ;  Bay  v.  Cook,  22  N.  J.  L.  343 ;  Ennis  Cotton 
OH  Co.  v.  Burks  (Tex.  1897),  39  S.  W.  Rep.  966. 

2  Whitney  v.  Wyman,  101  U.  S.  392;  Higgins  v.  Senior,  8  M.  &  W. 
834  ;  Johnson  v.  Smith,  21  Conn.  627. 


230        PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

the  presumption  is  the  other  way,  for  in  the  absence  of 
evidence  to  show  the  contrary,  it  is  unreasonable  to  sup- 
pose that  the  person  with  whom  the  alleged  agent  contracts 
consents  to  look  only  to  a  non-existent  person.1  This 
presumption,  however,  may  be  overcome,  for  a  person 
dealing  with  one  assuming  to  act  for  an  intended  cor- 
poration might  expressly  or  impliedly  agree  to  look  only 
to  the  future  corporation,  taking  the  risk  of  its  coming 
into  existence  and  adopting  the  contract  made  in  advance 
for  it,2  or  it  might  be  stipulated  that  the  agent  should 
in  no  event  be  personally  liable.3  In  such  cases,  it  would 
seem  to  follow  that  the  agent,  not  being  bound,  could 
not  enforce  the  contract,  unless  he  had  given  the  other 
party  a  valid  consideration  for  his  promise.  Applying 
these  rules  to  the  case  of  the  promoter  who  has  made 
a  contract  in  the  name  and  behalf  of  an  intended  corpo- 
ration, the  rights  and  liability  of  the  promoter  under  the 
contract  will  depend  upon  the  questions  of  fact  whether 
credit  was  given  to  him  or  to  the  inchoate  corporation, 
or  whether  he  expressly  or  impliedly  agreed  to  be  bound. 
If  the  contract  was  oral,  it  is  for  the  jury  to  determine 
the  intention  and  understanding  of  the  parties.4 

§  227.  In  Landman  v.  Entwistle,5  —  the  plaintiff  brought 
an  action  to  recover  for  his  services  as  engineer  of  a  pro- 
jected railway  company  against  the  defendant,  who  was 
one  of  the  provisional  committee  of  the  company.  It 
appeared  that  at  a  meeting  of  the  committee,  at  which 
the  plaintiff  was  present,  it  was  resolved  "  that  the  pro- 
visional committee  disclaim  the  intention  of  taking  on 

1  Eichbaum  v.  Irons,  6  Watts  &  Serg.  67. 

2  Higgins  v.  Hopkins,  3  Ex.   163;    Rennie  v.  Clarke,  5  Ex.  292; 
Landman  v.  Entwistle,  7  Ex.  632  ;  Case  Mfg.  Co.  v.  Soxman,  138  U.  S. 
431. 

8  Shoe  if  Leather  Nat.  Bank  v.  Dix,  123  Mass.  148. 
4  Higgins  v.  Hopkins,  supra. 
6  7  Ex.  632. 


EIGHTS   AND   LIABILITIES   OF   PROMOTEKS.  231 

themselves  any  personal  responsibility  as  regards  the  ex- 
penses incurred  or  to  be  incurred  in  or  about  the  company, 
and  that  no  such  responsibility  shall  attach  to  them."  At 
another  meeting,  at  which  the  plaintiff  was  also  present,  a 
resolution  was  passed  which  contained  a  statement  that 
the  plaintiff  had  said  "  that  he  would  make  no  claim  for 
his  services  until  there  should  be  sufficient  funds  of  the 
company  to  meet  any  demand  he  might  be  entitled  to 
make."  -  The  plaintiff  stated  in  a  letter  that  "  he  never 
understood  that,  unless  the  project  was  successful,  the 
engineers  were  to  abandon  all  claim;  but  he  did  under- 
stand that  the  individuals  comprising  the  committee  were 
not  to  be  held  personally  liable."  At  a  subsequent  meet- 
ing of  the  committee  it  was  resolved  "  that  the  committee 
bind  themselves  to  be  answerable  to  the  extent  of  £1,000, 
to  be  applied  to  engineering  and  surveying  purposes." 
The  scheme  was  abandoned,  and  deposits  to  the  amount 
of  £4,168,  which  had  been  received  by  the  committee, 
were  returned  to  the  shareholders.  It  was  held  that  the 
defendant  was  not  responsible,  the  contract  being  that 
the  plaintiff  should  be  paid  out  of  such  funds  as  could  be 
properly  applied  in  satisfaction  of  his  claim,  and  there  were 
no  funds  of  that  description. 

§  228.  On  -written  contract  question  of  intent  is  for  Court. 
—  If  the  contract  is  in  writing,  it  is  for  the  Court  to  pass 
upon  the  question  of  the  intent  of  the  parties,  and  in  con- 
struing a  written  contract  of  this  nature  parol  evidence  of 
the  real  intent  of  the  parties  is  inadmissible.  The  intent 
must  be  drawn  from  the  language  employed.  No  parol 
evidence  can  exclude  personal  liability  in  the  promoter,  if 
the  written  document  itself  makes  him  liable.1  If  the 
promise  is  made  in  the  name  of  the  intended  corporation, 
and  exclusively  as  its  contract,  and  is  accepted  as  such,  the 

1  Higgins  v.  Senior,  8  M.  &  W.  834. 


232        PROMOTERS   AND   PROMOTION  OF   CORPORATIONS. 

promoter  cannot,  under  what  would  seem  to  be  the  true 
rule,  be  held  liable  upon  it.  If,  on  the  other  hand,  the 
contract  contains  apt  words  to  bind  the  promoter  person- 
ally, he  will  be  held  on  the  contract,  although  he  may  sign 
as  an  agent.1  Thus,  in  Kelner  v.  Baxter?  the  plaintiff 
was  a  wine  merchant  and  the  proprietor  of  the  Assembly 
Rooms  at  Gravesend.  It  was  proposed  that  a  company 
should  be  formed  under  the  name  of  the  Gravesend  Royal 
Alexander  Hotel  Company,  Limited,  to  purchase  the  plain- 
tiff's premises  and  stock,  and  carry  on  a  hotel  business. 
The  plaintiff  was  to  be  the  manager,  and  the  defendants 
directors  of  the  proposed  company.  Pending  the  nego- 
tiations, the  business  was  carried  on  by  the  plaintiff,  and 
for  that  purpose  additional  stock  was  purchased  by  him, 
as  to  which  the  following  agreement  was  entered  into :  — 

To  JOHN  DACIER  BAXTER,  NATHAN  JACOB  CALISHER,  AND  JOHN 
DALES,  ON  BEHALF  OF  THE  PROPOSED  GRAVESEND  ROYAL  ALEX- 
ANDER HOTEL  COMPANY,  LIMITED, 

GENTLEMEN,  —  I  hereby  propose  to  sell  the  extra  stock  now  at  the 
Assembly  Rooms,  Gravesend,  as  per  schedule  hereto,  for  the  sum  of 
£900,  payable  on  the  28th  of  February,  1866. 

(Signed)  JOHN  KELNER. 

Then  followed  a  schedule  of  the  stock  to  be  purchased, 
and  at  the  end  was  written  as  follows  :  — 

To  MR.  JOHN  KELNER, 

SIR,  —  We  have  received  your  offer  to  sell  the  extra  stock  as  above, 
and  hereby  agree  to  and  accept  the  terms  proposed. 
(Signed)  J.  D.  BAXTER, 

N.  J.  CALISHER, 
J.  DALES, 

On  behalf  of  the  Gravesend  Royal  Alexander  Hotel 
Company,  Limited. 

1  Hall  v.  Crandall,  29  Cal.  567 ;  Johnson  v.  Smith,  21  Conn.  627 ; 
Hurst  v.  Salisbury,  55  Mo.  310. 

2  L.  R.  2  C.  P.  174. 


RIGHTS  AND  LIABILITIES   OF   PROMOTERS.  233 

The  goods  were  handed  over  to  the  representatives  of 
the  proposed  company,  and  were  consumed  in  the  business. 
Subsequent  to  the  purchase  of  the  goods,  the  company  was 
incorporated,  but  collapsed  before  the  money  was  paid.  It 
was  held  that  the  defendants  were  personally  liable  on 
their  agreement,  as  for  goods  sold  and  delivered ;  that  no 
subsequent  ratification  by  the  company  could  relieve  them 
from  that  liability  without  the  assent  of  the  plaintiff ;  and 
that  parol  evidence  was  not  admissible  to  show  that  per- 
sonal liability  was  not  intended.  "  Construing  the  docu- 
ment ut  res  magis  valeat  quam  pereat"  said  Willes,  J., 
"  we  must  assume  that  the  parties  contemplated  that  the 
persons  signing  it  would  be  personally  liable.  Putting  in 
the  words,  *  on  behalf  of  the  Gravesend  Royal  Alexander 
Hotel  Company,'  would  operate  no  more  than  if  a  person 
should  contract  for  a  quantity  of  corn  <  on  behalf  of  my 
horses.' " 

§  229.  in  Scott  v.  Ebury,1  —  one  Jeyes,  acting  as  the 
solicitor  and  secretary  of  a  projected  railway  company, 
by  the  authority  of  the  promoters,  and  by  means  of  a  check 
signed  by  two  of  them,  obtained  from  the  plaintiff  an  ad- 
vance of  £500,  to  be  applied  in  payment  of  parliamentary 
fees,  upon  the  agreement  contained  in  the  following  letter 
addressed  to  the  plaintiff :  — 

I  have  to  request  that  you  will  allow  the  directors  of  the  Rick- 
mansworth,  Amershan,  and  Chesham  Railway  to  draw  to  the  extent 
of  £1,000,  to  be  repaid  out  of  the  calls  on  shares. 

The  £1,000  was  placed  to  the  credit  of  the  company  in 
an  account  in  the  plaintiff's  books,  and  £500  was  drawn 
therefrom.  An  act  authorizing  the  construction  of  the 
railway  subsequently  passed,  the  promoters  being  named 
therein  as  the  first  directors,  and  at  a  directors'  meeting  it 

1  L.  R.  2  C.  P.  255. 


234        PROMOTERS  AND   PROMOTION   OF   CORPORATIONS. 

was  resolved  that  the  acts  of  Jeyes  should  be  adopted  and 
confirmed.  No  shares  were  allotted  or  calls  made,  and  the 
undertaking  was  not  proceeded  with.  It  was  held  that 
the  advance  was  made  upon  the  personal  responsibility  of 
those  who  signed  the  check,  and  that  the  subsequent 
adoption  of  their  acts  by  the  directors  did  not  alter  their 
position.  On  the  part  of  the  defendants,  it  was  contended 
that  the  loan  was  not  to  them  personally,  but  to  the  com- 
pany, to  be  repaid  out  of  the  funds  of  the  company  when 
funds  should  be  obtained  by  means  of  calls.  As  to  this 
contention,  Willes,  J.,  said :  "  The  true  explanation  of  the 
expression  of  the  letter,  *  to  be  repaid  out  of  calls  on 
shares,'  is  this.  Parties  who  emb.ark  in  schemes  like  this 
do  not  always  contemplate  the  true  future.  They  assume 
that  everything  will  go  on  according  to  their  hopes  and 
expectations,  and  provide  for  what  shall  be  done  in  that 
event,  without  regarding  the  possibility  of  failure.  Here, 
they  provided  for  the  case  which  they  hoped  for,  and  in 
that  case  stipulated  that  the  money  should  be  repaid  out 
of  calls.  Would  any  person  have  advanced  the  money 
upon  an  agreement  such  as  the  defendants  contend  this 
to  be  ?  Clearly  not.  Suppose  a  farmer  were  to  borrow 
money  to  be  repaid  when  he  sold  his  crop  of  hay,  and 
after  the  lapse  of  a  reasonable  time  for  effecting  a  sale  the 
ricks  were  burnt  down,  would  he  be  excused  from  repaying 
the  loan  ?  Or,  suppose  goods  in  course  of  transit  to  be 
sold,  to  be  paid  for  on  arrival,  and  they  are  lost  on  the 
way,  could  it  be  contended  that  the  non-arrival  of  the 
goods  would  be  an  answer  to  an  action  for  the  price  ?  I 
need  hardly  say  it  would  not.  In  each  of  these  cases,  it  is 
simply  a  provision  for  the  time  of  payment." 

§  230.  Promoter  making  contract  in  name  of  corporation 
usually  not  liable  on  the  contract.  —  But  may  be  liable  for  mis- 
representation as  to  existence  of  corporation.  —  As  has  been 


RIGHTS   AND   LIABILITIES   OF   PROMOTERS.  235 

said,  when  the  promise  has  been  made  in  the  name  of  the 
intended  corporation,  and  exclusively  as  its  contract,  and 
has  been  accepted  as  such,  the  promoter  cannot,  under  what 
would  appear  to  be  the  true  rule,  be  held  liable  upon  it. 
The  mere  fact  that  he  does  not  bind  his  assumed  principal 
cannot  make  him  responsible  upon  the  contract ;  but  he 
may  be  liable  in  damages  for  misrepresentation,  by  hold- 
ing himself  out  as  an  agent  for  an  existing  corporation, 
when  in  fact  the  corporation  named  as  such  is  not  in 
existence.1  The  reason  why  the  promoter  should  not 
be  made  personally  liable  on  such  a  contract  is,  as  it  has 
been  well  put  in  the  caae  of  an  agent,  this :  "  The 
man  whom  he  induced  to  enter  into  the  contract  did 
not  contemplate  him  as  the  other  party  to  it,  or  look 
to  any  one  but  the  alleged  principal.  The  remedy  should 
be,  as  it  is,  for  misrepresentation,  innocent  or  fraudu- 
lent." 2  In  order  to  sustain  an  action  for  damages  against 
the  promoter,  it  is  obviously  essential  to  show  that  the  non- 
existence  of  the  corporation  was  not  known  to  the  person 
dealing  with  the  promoter ; 3  and  that  such  person  was 
misled  to  his  injury.  If  he  knew  that  the  corporation  was 
not  in  existence  he  could  not  have  been  deceived,  and  if 
the  corporation  should  subsequently  come  into  existence 
and  adopt  the  contract  the  element  of  damage  might  be 
wanting.  It  is  immaterial  whether  the  promoter  made  the 
representation  as  to  the  existence  of  the  corporation  inno- 
cently or  fraudulently.  In  the  former  case,  his  liability 

1  Je/ls  v.  York,  10  Cash,  at  p.  395;  fiartlett  v.  Tucker,  104  Mass.  337; 
Gilmore  v.  Bradford,  82  Me.  547;  McCurdy  v.  Rogers,  21  Wise.   199 ; 
Patterson  v.  Lippencott,  47  N.  J.  L  457  ;  Duncan  v.  Niles,  32  111.  532  ; 
Johnson  v.  Smith,  21  Conn.  627 ;  Hall  v.  Crandall,  29  Cal.  567.     Contra, 
Keener  v.  Harrod,  2  Md.  63  ;  Lewis  v.  Tilton,  64  Iowa,  220 ;  Lagrone  v. 
Timmerman  (S.  C.  1896),  24  S.  £.  Rep.  290. 

2  Anson  on  Contracts,  344. 

3  Jefts  v.  Fork,  10  Cush.  at  p.  395. 


236        PROMOTERS  AND   PROMOTION   OF  CORPORATIONS. 

may  be  put  on  the  ground  of  the  breach  of  an  implied 
warranty,1  or  on  the  ground  of  liability  for  an  innocent 
misrepresentation,  as  an  exception  to  the  general  rule 
of  law  that  an  action  for  damages  will  not  lie  against 
a  person  who  honestly  makes  a  misrepresentation  which 
misleads  another.2  In  the  latter  case,  his  liability  is  for 
deceit. 

§  231.  Effect  of  adoption  by  corporation  of  contract  on 
which  credit  was  given  to  promoter.  —  If  it  appears  that 
credit  was  given  to  the  promoter,  and  that  he  is  personally 
bound  on  the  contract,  then  the  adoption  or  ratification  of 
the  contract  by  the  corporation,  when  formed,  would  not 
free  him  from  liability  without  the  creditors'  assent.  In 
such  case  the  creditor  could  elect  whether  to  sue  the  cor- 
poration or  the  promoter ;  but  it  would  seem  that  he  could 
not  hold  both.3  If  the  promoter  should  be  held,  under 
such  circumstances,  the  corporation  would  probably  be  iin- 
pliedly  bound  to  indemnify  him,  inasmuch  as  it  would  be 
entitled  to  the  full  benefit  of  the  contract  against  the  pro- 
moter, who  would  stand  in  such  respect  in  the  position 
of  its  agent.  If  the  promoter  is  held  to  the  duties  and 
liabilities  of  an  agent  under  a  contract  adopted  or  rati- 
fied by  the  corporation,  he  should  have  the  rights  of  an 
agent.4  If  credit  was  not  given  to  the  promoter,  then  he 
would  be  free  from  liability,  whether  the  corporation  did 
or  did  not  subsequently  adopt  or  ratify  the  contract ;  and 
in  such  case,  not  being  bound  himself,  and  the  contract 
having  been  made  for  and  on  the  credit  of  the  intended 

1  Gotten  v.  Wright,  7  El.  &  Bl.  301 ;  8  El.  &  Bl.  647. 

3  Per  Lindley,  J.,  in  Fairbanks  Ex"rs  v.  Humphreys,  18  Q.  B.  D.  62. 
8  Queen   City  Furniture  tf   Carpet   Co.  v.  Crawford,   127  Mo.  356; 

Meachara  on  Agency,  Sect.  698  ;  Case  Mfg.  Co.  v.  Soxman,  138  U.  S. 
431.  Contra,  Ennis  Cotton  Oil  Co.  v.  Burks  (Tex.  1897),  39  S.  W. 
Rep.  966. 

4  Taylor  on  Corporations,  Sects.  82,  85. 


RIGHTS   AND  LIABILITIES   OF   PEOMOTEKS.  237 

corporation,  he  could  not  enforce  it,  unless  he  had  given 
the  other  party  a  valid  consideration  for  his  promise.  But 
if  the  contract  was  made  with  the  promoter  personally,  he 
may  enforce  it. 

§  232.  in  Abbott  v.  Hapgood,1  —  the  plaintiffs  had  agreed 
to  form  a  manufacturing  corporation,  under  the  name  of 
Penn  Match  Company,  Limited,  if  they  could  obtain  certain 
machinery  from  a  firm  which  alone  could  furnish  it ;  and, 
for  the  purpose  of  carrying  out  the  agreement,  and  in 
the  name  and  for  the  benefit  of  the  projected  corporation, 
applied  therefor,  informing  the  firm  that  the  organization 
of  the  corporation  would  be  proceeded  with  and  a  factory 
built  for  it  only  in  case  they  could  make  a  contract  with  the 
firm  for  the  machinery.  The  firm  agreed  "  to  furnish  the 
Penn  Match  Company,  Limited,  with  the  machinery  "  at  a 
price  stated,  but  subsequently  refused  to  deliver  it,  where- 
upon an  action  was  brought  against  the  firm  in  the  name 
of  the  projected  corporation  to  recover  damages  for  such 
refusal,  in  which  judgment  was  rendered  for  the  defend- 
ants. Subsequently  the  corporation  was  fully  organized,  the 
factory  was  built  for  it,  and  it  started  in  business.  Upon 
the  facts  reported,  the  Court  was  of  opinion  that  the  de- 
fendants as  well  as  the  plaintiffs  must  have  understood 
that  the  corporation  was  only  projected,  that  the  plaintiffs, 
acting  jointly  as  individuals,  constituted  the  only  party 
who  could  contract  with  the  defendants  in  the  manner 
proposed,  that  it  was  evident  that  both  parties  intended  to 
enter  into  binding  contracts,  and  that  the  plaintiffs  assumed 
the  name  "  Penn  Match  Company,  Limited,"  as  that  in 
which  they  chose  to  do  business  in  reference  to  the  projected 
company  until  their  organization  should  be  completed,  and 
they  should  turn  over  the  business  to  the  new  company, 
which  would  be  composed  of  themselves  in  a  new  relation. 

1  150  Mass.  248. 


238    PROMOTERS  AND  PKOMOTION  OF  CORPORATIONS. 

The  trial  court  ordered  a  verdict  for  the  defendants,  and 
reported  the  case  for  the  determination  of  the  appellate 
court,  which  set  aside  the  verdict  and  ordered  a  new  trial. 
The  plaintiffs  were  allowed  to  amend  the  declaration  so 
as  to  state  the  contract  truly,  that  is,  by  setting  out  their 
own  agreement  to  take  and  pay  for  the  machinery  which 
constituted  the  consideration  for  the  agreement  made  by 
the  defendants. 

§  233.  Promoters  not  prima  facie  partners.  —  Co-promot- 
ers  are  not,  as  such,  partners.  A  mere  agreement  to  form  a 
partnership  in  the  future  .does  not  create  a  present  partner- 
ship. A  fortiori,  an  agreement  by  persons  simply  to  organ- 
ize a  corporation  does  not  constitute  such  persons  partners. 
Nor  are  promoters  prim  a  facie  each  other's  agents.  In  order 
to  render  a  promoter  liable  for  the  acts  of  his  co-promoters, 
it  must  be  shown  as  matter  of  fact  that  the  former  author- 
ized the  latter  to  bind  him,  or  held  them  out  as  so  author- 
ized. In  an  action  against  a  promoter  on  a  contract  not 
made  personally  by  him,  but  by  a  co-promoter,  the  point  to 
be  decided  is  whether  the  latter  was  the  former's  agent,  or 
was  held  out  by  him  as  his  agent,  for  the  purpose  of  mak- 
ing the  contract,  and  made  it  as  such.  The  agency  or 
holding  out,  as  in  any  other  case  where  such  question  is  in 
issue,  may  be  implied  from  words  or  conduct.1 

§  234.  English  cases  as  to  liability  of  promoters  on  con- 
tracts made  by  co-promoters.  —  In  England,  the  preliminary 

1  Reynell  v.  Lewis,  Wylde  v.  Hopkins,  15  M.  &  W.  517;  Capper's  Case, 

1  Sim.  N.  s.  178;   Forrester  v.  Bell,  10  Ir.  Law  Rep.  555;  Norris  v. 
Cottle,2  H.  L.  Cas.  647;    Button  v.    Thompson,  3  H.   L.   Gas.   161; 
Bright  v.  Hutton,  3  H.  L.  Cas.   348;    Wood  v.  Argyll,  6  M.  &  G.  928; 
Newton  v.  Belcher,  12  Q   B.  921  ;  Rutherford  v.  Hill,  22  Or.  218;  Horn- 
blower  v.  Crandall,  78  Mo.  581  ;  Ward  v.  Brigham,  127  Mass.  25.    Com- 
pare Dole  v.  Wooldredge,   135  Mass.  140 ;    Sproat  v.  Porter,  9  Mass. 
300.     It  was  at  one  time  held  otherwise  in  England  :    Holmes  v.  Hig- 
gins,  I  B.  &  C.  74  ;  Lucas  v.  Beach,  1  M.  &  G.  417  ;   Hutton  v.  Uphill, 

2  H.  L.  Cas.  674 ;  but  these  cases  are  no  longer  law. 


RIGHTS   AND   LIABILITIES   OF   PEOMOTEES.  239 

work  of  getting  up  a  company  is  usually,  it  would  appear, 
performed  under  the  direction  of  a  provisional  committee 
or  a  managing  committee  of  the  intended  company,  con- 
sisting of  the  promoters  or  of  others  selected  by  them. 
The  reports  contain  many  cases  presenting  the  question  of 
the  liability  of  a  particular  member  or  members  of  such  a 
committee  to  tradesmen  and  others  for  work  performed  or 
materials  furnished  in  the  formation  of  the  company,  at 
the  request,  not  of  the  defendants  personally,  but  of  other 
members  or  of  the  secretary  or  solicitor  of  the  committee. 
As  the  existence  of  an  authority  proceeding  from  the  mem- 
ber sought  to  be  charged  to  others  to  bind  him  is  a  question 
of  fact,  to  be  determined  by  a  jury,  more  or  less  apparent 
conflict  will  be  found  in  these  cases.1  But  certain  general 
rules  may  be  deduced  from  them. 

§  235.  Ordinarily  promoter  not  liable  from  allowing  his 
name  to  appear  in  prospectus,  or  signing  articles  of  incorpo- 
ration, if  he  does  not  act  in  undertaking.  — A  COmmittee- 
man,  who  merely  allows  his  name  to  appear  in  a  prospectus, 
which  states  the  names  of  the  committee,  and  nothing 
more  from  which  liability  on  his  part  might  be  inferred, 
and  who  does  not  act  with  relation  to  the  undertaking, 
incurs  no  liability  for  work  or  supplies  furnished  at  the 
request  of  other  members,  or  of  the  solicitor  or  secretary. 
The  mere  announcement  that  several  persons  are  acting 
together  to  organize  a  company  does  not  justify  the  in- 
ference that  one  has  authorized  the  others  to  pledge  his 
credit  in  the  matter.2  Thus,  in  the  leading  cases  of  Rey- 

1  For  example,  in  Wood  v.  Argyll,  6  M.  &  G.  928,  and  in  Lake  v. 
Argyll,  6  Q.  B.  477,  the  same  acts  were  relied  on  to  show  that  the 
defendant   had   authorized  others  to  pledge  his  credit.     In  the  first 
case  the  verdict  was  for  the  defendant,  in  the  last  for  the  plaintiff, 
and  iu  each  case  the  Court  declined  to  disturb  the  verdict. 

2  Reynell  v.  Lewis,  Wylde  v.  Hopkins,  15  M.  &  W.   517  ;   Barker  v. 
Stead,  3  C.  B.  946;  Norris  v.  Cattle,  2  H.  L.  Caa.  647  ;  Ex  parte  Roberts, 


240    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

nell  v.  Lewis,  and  Wylde  v.  Hopkins?  which  were  actions 
brought  by  advertising  agents  and  map  makers  against 
members  of  the  provisional  committee  of  two  railway  com- 
panies, it  appeared  in  each  of  the  cases  that  prospectuses 
and  advertisements  had  been  issued  by  the  committee,  in 
which  the  name  of  the  defendant  was  set  forth  as  a  mem- 
ber of  the  committee  ;  the  plaintiff  was  employed  by  the 
solicitor  of  the  committee ;  the  defendant  knew  what  was 
being  done  ;  but  no  other  facts  appeared  to  show  that  the 
defendant  had  authorized  his  credit  to  be  pledged.  The 
jury  having  found  for  the  plaintiff,  the  Court  in  each  case 
granted  a  new  trial. 

The  mere  act  of  executing  and  filing  articles  of  incor- 
poration by  several  promoters  does  not  render  one  respon- 
sible for  contracts  made  in  the  course  of  the  undertaking 
by  the  others.  Thus  in  Rutherford  v.  Hill,  articles  of  in- 
corporation were  executed  and  filed  by  three  persons,  one 
of  whom  assumed  to  do  business  under  the  proposed  cor- 
porate name,  and  contracted  debts,  before  the  corporation 
came  into  existence.  It  was  held  that  the  others  were  not 
liable  for  such  debts.  "  It  is  not  doubted,"  said  the  Court, 
"  that  cases  might  arise,  and  can  readily  be  imagined, 
where  the  incorporators  sought  to  be  charged  might  take 
such  part  in  conducting  the  business  or  hold  themselves 

2  Mac.  &  G.  192 ;  Patrick  v.  Reynolds,  1  C.  B.  N.  s.  727 ;  Bailey  v. 
Macaully,  13  Q.  B.  815. 

In  Sproat  v.  Porter,  9  Mass.  300,  decided  in  1812,  it  was  held  that 
where  persons  associate  together  for  the  purpose  of  instituting  a 
banking  corporation,  and  at  a  meeting  of  the  associates,  an  agent  is 
employed  to  attend  the  legislature  for  the  purpose  of  procuring  a 
charter,  all  the  associates,  including  those  who  did  not  attend  the 
meeting  and  did  not  know  of  the  employment,  are  jointly  liable  to 
the  agent  for  his  services.  The  opinion  is  very  brief,  and  no  author- 
ities are  cited.  Compare  Ward  v.  Brigham,  127  Mass  25;  Dole  v. 
Wooldredge,  135  Mass.  140. 

1  15  M.  &  W.  517. 


RIGHTS   AND   LIABILITIES   OF   PEOMOTERS.  241 

out  to  the  world  as  principals  in  the  business,  that  they 
would  be  held  liable,  but  this  would  grow  out  of  their  con- 
duct in  carrying  on  the  business,  and  not  out  of  the  mere 
fact  of  signing  and  filing  the  articles." 1 

§  236.  Statements  in  prospectus  in  -which  promoter  allows 
his  name  to  be  used  may  impose  liability  upon  him.  —  A 
prospectus  or  advertisement  setting  forth  the  name  of 
the  defendant  as  a  member  of  the  committee  may,  how- 
ever, contain  such  announcements  as  to  justify  the  infer- 
ence that  a  general  authority  has  been  conferred  by  the 
defendant  on  his  co-committee-men,  or  on  others,  sufficient 
to  make  their  acts  his  acts.  Thus,  in  Collingwood  v.  Berk- 
ley? a  prospectus  of  a  projected  company  for  the  convey- 
ance of  emigrants  to  British  Columbia  contained  statements 
calculated  to  induce  intending  emigrants  to  believe  that  ar- 
rangements had  been  perfected  for  the  object  in  view,  and 
inviting  them  to  take  tickets  for  their  passage  and  the  public 
to  purchase  shares.  This  prospectus  was  shown  by  the 
secretary  to  the  defendants  and  they  were  asked  to  allow 
their  names  to  be  inserted  therein  as  directors ;  to  which 
they  consented  on  being  qualified,,  that  is,  presented  each 
with  two  hundred  paid-up  shares,  and  indemnified.  Their 
names  were  accordingly  inserted,  and  the  prospectus  ad- 

1  22  Or.  218;  Johnson  v.  Corsner,  34  Miun.  355;  Railroad  Gazette  v. 
Wherry,  58  Mo.  App.  423.     Contra,  Wechselberg  v.  Flour  City  Nat. 
Bank,  64  Fed.  Rep.  90,  Woods,  J.,  dissenting.     In  this  case  nothing 
appeared  to  show  that  the  party  sought  to  be  charged  had  authorized 
his  credit  to  be  pledged,  unless  it  was  the  fact  that  he  was  one  of  the 
incorporators.     His  co-incorporators  began  business  under  the  corpo- 
rate name,  before  the  corporation  acquired  life,  and  held  him  out  as 
an  officer.     He  knew  that  they  were  doing  business  as  stated,  but  did 
not  know  that  they  were  holding  him  out  as  an  officer,  and  did  not 
participate  in  the  business,  nor  receive  any  emolument  or  profit  there- 
from.    Yet  because  by  slight  attention  to  the  matter  he  might  have 
obtained  knowledge  of  the  use  of  his  name,  the  majority  of  the  Court 
held  that  he  must  be  taken  to  have  had  that  knowledge. 

2  15  C.  B.  N.  s.  145. 

16 


242        PROMOTERS  AND  PROMOTION  OF   CORPORATIONS. 

vertised  in  the  Times.  Held  that  from  these  facts  the 
jury  were  warranted  in  inferring  that  one  who  contracted 
with  the  secretary  for  a  passage,  and  paid  his  money  upon 
the  faith  of  the  representations  contained  in  the  prospectus, 
did  so  upon  the  credit  of  the  defendants,  and  consequently 
that  he  was  entitled  to  sue  them  for  a  breach  of  such  con- 
tract. The  transaction  of  the  prospectus  authorized  the 
secretary  to  hold  out  that  the  defendants  were  really  direct- 
ing him  in  obtaining  fares  from  emigrants  for  transport. 
As  against  the  defendants,  the  jury  was  warranted  in  find- 
ing that  they  did  whatever  the  Secretary  by  their  authority 
represented  they  were  doing,  within  the  limit  of  the  opera- 
tions described  in  the  prospectus,  and  that  therefore, 
within  that  limit,  they  were  liable  on  the  contract  which 
the  secretary  made  for  them  on  the  credit  of  their  names. 
It  appeared  that  the  secretary  had  given  to  the  plaintiff  a 
copy  of  the  prospectus,  and  the  plaintiff  stated  that  he  was 
induced,  after  reading  it,  to  make  the  contract  in  reliance 
on  the  credit  of  the  defendants  as  directors. 

§  237.  When  promoter  has  acted  in  undertaking,  question 
for  jury  •whether  he  has  authorized  co-promoters  to  bind  him. 
—  If  a  committee-man  not  only  takes  upon  himself  that 
character,  but  also  acts  in  the  affairs  of  the  intended  com- 
pany, it  is  a  question  for  the  jury  whether  or  not  he  has  by 
his  acts  authorized  his  fellow  members  or  the  solicitor  or 
secretary  to  pledge  his  credit  for  the  expenses  to  be  in- 
curred in  the  formation  of  the  company.  For  example,  if 
he  has  attended  a  meeting  of  the  committee  at  which  it 
was  decided,  without  dissent  on  his  part,  to  do  all  that 
could  be  considered  necessary  to  start  the  company  by 
means  of  work  and  materials  of  a  particular  description, 
this  is  evidence  that  he  sanctioned  what  it  did  in  the 
progress  of  the  affair.  It  tends  to  show  that  he  knew  what 
the  committee  was  doing,  and  concurred  therein.  If  the 


EIGHTS   AND   LIABILITIES   OF   PEOMOTERS.  243 

authority  is  found  to  have  been  given,  it  is  immaterial  that 
he  did  not  intend  to  pledge  his  credit. 

§  238.  In  Riley  v.  Fackington,1  —  the  defendant  was  asso- 
ciated with  one  Whitehead  and  others  in  the  formation  of 
a  company.  At  a  meeting  of  the  projectors  at  which  the 
defendant  was  chairman,  a  resolution  was  passed  that  the 
prospectus  then  read  and  marked  with  the  defendant's  in- 
itials be  approved  and  printed  for  circulation.  At  a  subse- 
quent meeting,  of  which  also  the  defendant  was  chairman, 
a  further  resolution  was  passed,  "  that  the  prospectus,  as 
altered  and  marked  with  the  chairman's  initials,  be  ap- 
proved as  the  prospectus  of  the  company,  and  that  the 
same  be  printed  for  circulation  and  advertised  at  the  dis- 
cretion of  Whitehead,  as  early  as  possible."  Whitehead 
employed  the  plaintiffs  to  print  the  prospectus,  showing 
them  the  initial  copy  and  telling  them  that  he  was  au- 
thorized by  the  defendant  to  get  it  printed.  The  pro- 
spectus when  printed  was  delivered  at  the  office  of  the 
company,  and  was  adopted  and  circulated  by  the  defendant. 
There  was  an  arrangement,  not  communicated  to  the  plain- 
tiffs, between  the  defendant  and  Whitehead,  that  all  ex- 
penses of  forming  the  company,  down  to  the  allotment  of 
shares,  were  to  be  borne  by  Whitehead.  Held  that  there 
was  evidence  from  which  the  jury  might  infer  that  White- 
head  had  authority  to  pledge  the  defendant's  credit  for  the 
printing.2 

§  239.  Promoter's  liability  on  contract  made  before  he  be- 
came a  promoter.  —  Effect  of  admission  of  liability.  —  Ordina- 
rily, one  who  becomes  a  member  of  the  provisional  committee 

1  L.  R.  2  C.  P.  536. 

2  See  also  Maddickv.  Marshall,  16  C.  B.  N.  8.  387;   in  error,  17 
C.  B.  N.  8.  829  ;   Reynell  v.  Lewis,  15  M.  &  W.   517 ;   Norburtfs  Case, 
5  DeG.  &  S.  423 ;    Pearson's  Case,  3  DeG.  M.  &  G.  241 ;   Bailey  v. 
Macaully,  13  Q.  B.  815 ;    Burbridge  v.  Morrii,  3  H.  &  C.  664;    Roberts 
Mfg.  Co.  v.  Schlick,  62  Minn.  332;  Fredenhall  v.  Taylor,  26  Wise.  286. 


244    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

is  not  liable  on  a  contract  made  by  the  other  members  prior 
thereto,  even  though  the  contract  is  in  part  executed  after 
he  becomes  a  member.1  As  the  liability  of  the  committee- 
man  arises,  not  from  his  filling  that  character,  but  from  his 
authorizing,  expressly  or  impliedly,  the  orders  for  goods  or 
services,  his  admission  of  general  liability  may  be  evidence 
of  his  having  authorized  such  orders  before  his  name  ap- 
peared on  the  committee.  The  jury  are  to  consider  whether 
the  admission  was  made  because  the  actual  liability  in  law 
was  questionable,  and  for  the  purpose  of  preventing  litiga- 
tion, or  whether  the  admission  is  referable  to  a  conscien- 
tious conviction  that  his  acts  have  made  him  personally 
liable.  In  the  latter  case,  they  may  infer  his  general 
liability.2 

§  240.  To  hold  promoter,  credit  must  have  been  given  to 
him.  —  If  it  is  found  as  a  fact  that  a  committee-man  has 
authorized  his  co-committee-men,  or  others,  to  hold  him  out 
as  personally  responsible,  then  the  further  inquiry  is  neces- 
sary whether  or  not  the  credit  was  given  on  the  faith  of  his 
being  so  personally  responsible.  He  cannot  be  held  if  the 
creditor  has  looked  solely  to  the  deposits  on  shares,  as  the 
fund  from  which  payment  is  to  be  made,  or  solely  to 
the  credit  of  the  future  company.3 

§  241.  Joint  liability  of  promoters.  —  Effect  of  release  of 
one.  —  If  promoters  are  jointly  liable  on  a  contract,  a  re- 
lease of  one  releases  all.4  Thus,  in  Burgess  v.  Sherman? 
the  plaintiff  assigned  his  invention,  and  patent  therefor,  to 

1  Beale  v.  Monk,  10  Q.  B.  976. 

2  Newton  v.  Belcher,  12  Q.  B.   921 ;  Newton  v.  Liddiard,  12  Q.  B. 
925 ;   Bailey  v.  Macaully,  13  Q.  B.  815. 

8  Bailey  v.  Macaully,  supra ;  Thompson  v.  First  Nat.  Bank  of  Toledo, 
111  U.  S.  529. 

*  Newton  v.  Blunt,  3  C.  B.  675 ;  Turner  v.  Davies,  2  Wms.  Saund. 
148. 

6  147  Penn.  254. 


EIGHTS  AND   LIABILITIES   OF  PKOMOTERS.  245 

five  persons,  on  their  agreement  to  form  a  corporation  to 
carry  the  invention  into  effect,  and  to  pay  him  a  certain 
sum  out  of  the  first  sales  of  its  stock.  Three  of  them 
transferred  to  a  fourth  all  their  interest  in  the  agreement, 
without  the  plaintiff's  consent,  before  the  corporation  was 
formed.  Thereafter  powers  of  attorney  to  transfer  the 
patent  were  given  to  the  plaintiff  by  such  transferee,  as 
owner  of  four-fifths  of  the  patent,  and  by  the  remaining 
party  to  the  agreement  as  owner  of  one-fifth,  under  which 
the  plaintiff  transferred  the  patent  to  the  corporation. 
Held  that  having  thereby  assented  to  the  withdrawal  of  said 
three  persons  from  the  agreement,  he  could  not  recover  in 
an  action  thereon  against  any  of  the  parties  thereto. 

§  242.    Right  of  promoter  to  indemnity  from   co-promoters. 

—  If,  as  matter  of  fact,  a  relation  of  partnership,  or  agency, 
exists  between  promoters,  they  will,  as  among  themselves, 
be  held   in   their  dealings  to  the  accountability  imposed 
by  the  rules  applicable  to  partners  and  agents.1     If  their 
conduct  or  words  have  been  such  as  to  induce  third  per- 
sons, acting  reasonably,  to  believe  that  they  were  partners 
or  agents  for  each  other,  and  to  give  credit  accordingly,  on 
the  order  of  one  or  more  of  the  members,  yet  in  truth  no 
such  relation  existed,  those  upon  whom  liability  has  been 
fixed  by  the  order,  but  who  did  not  expressly  or  impliedly 
authorize  it,  are  entitled  to  be  indemnified  by  those  who 
have  thus  put  them  to  loss.2 

§  243.    Right  of  promoter  to  contribution  from  co-promoters. 

—  In  case  promoters  are  jointly  liable  for  an  indebtedness, 
and  one  is  obliged  to  pay  the  whole  debt,  he  can  enforce 
contribution  from  his  co-promoters.3 

1  See  Chapter  VII.  as  to  fiduciary  rights  and  liabilities  ;  Hawk  v. 
Brownell,  120  111.  161. 

2  Taylor  on  Corporations,  2d  ed.,  Sect.  80. 

8  Boulton  v.  Peplow,  9  C.  B.  483  ;  Spottiswoode's  Case,  6  DeG.  M.  & 


246        PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

§  244.  In  Batard  v.  Hawes,1  —  it  appeared  that  the  plain- 
tiff, the  defendant,  and  several  other  persons  had  jointly 
employed  an  engineer  to  make  plans  and  sections  and  to 
do  engineering  work,  preparatory  to  bringing  a  bill  before 
Parliament  for  the  incorporation  of  a  railway  company. 
The  plaintiff  was  sued  by  the  engineer  for  the  amount  of 
his  bill,  and  was  obliged  to  pay  him ;  and  he  then  brought 
an  action  to  recover  from  the  defendant  his  share  of  contri- 
bution. The  jury  found  that  there  were  twelve  persons,  in- 
cluding the  plaintiff  and  the  defendant,  who  were  parties  to 
the  original  employment  of  and  contract  with  the  engineer, 
and  that  two  of  those  persons  had  died  before  the  plaintiff's 
payment  of  the  engineer's  bill.  It  having  been  decided  that 
the  plaintiff  was  entitled  to  enforce  contribution  from  the 
defendant,  the  question  arose  whether  the  amount  to  be 
contributed  by  the  defendant  was  to  be  calculated  according 
to  the  number  of  original  joint  contractors,  or  according 
to  the  number  of  those  who  were  alive  when  the  payment 
was  made,  and  against  whom  the  right  of  the  creditor  to 
sue  at  law  had  survived.  It  was  held  that  the  plaintiff 
was  entitled  to  recover  from  the  defendant  one-twelfth  of 
the  debt,  the  liability  of  a  co-contractor  to  one  who  has 
paid  the  entire  debt  being,  at  law,  to  contribute  an  aliquot 
part  according  to  the  number  of  persons  originally  liable, 
without  reference  to  the  number  liable  at  law  at  the  time 
of  payment. 

§  245.  In  absence  of  agreement,  promoter  cannot  enforce 
payment  for  his  services  from  co-promoters.  —  In  the  absence 
of  agreement,  promoters  are  not  entitled  to  remuneration 

G.  345;  Lefray  v.  Gore,  1  Jo.  &  Lat.  571.  But  promoters  are  not,  as 
such,  contributories  under  the  English  Winding-Up  Acts.  Bright  v. 
Hutton,  3  H.  L.  Cas.  341.  In  2  Lindley  on  Partnership  (4th  ed.), 
1375,  the  cases  directly  or  indirectly  overruled  by  Bright  v.  Hutton  are 
enumerated. 

i  2  El.  &  B.  287. 


EIGHTS  AND  LIABILITIES   OF  PEOMOTERS.  247 

from  each  other  for  services  in  promoting  the  company. 
Thus,  if  one  who  is  the  inventor  of  a  scheme  procures 
others  to  act  as  a  committee,  with  the  intention  of  forming; 

*  o 

a  company  to  carry  the  scheme  into  effect,  and  he  himself 
acts  as  secretary  to  the  committee,  he  cannot  maintain  an 
action  against  one  of  the  committee  for  his  services,  as  such 
secretary,  or  for  his  trouble,  or  for  journeys  he  undertakes 
in  furtherance  of  the  execution  of  the  scheme.1 

§  246.  No  contract  between  promoters  to  go  forward  im- 
plied from  their  association  together.  —  The  law  does  not 
imply,  from  the  mere  association  together  of  promoters  to 
organize  a  corporation,  that  they  have  contracted  with  one 
another  to  carry  out  the  enterprise.  Accordingly,  it  has  been 
held  that  a  promoter  who  is  to  sell  land  to  a  projected  cor- 
poration cannot  hold  his  co-promoters  liable  for  damages  for 
failure  to  organize  the  corporation.2  There  may,  however, 
be  a  valid  agreement  to  form  a  corporation,  and,  although 
a  Court  of  Equity  will  not  on  well  settled  principles  decree 
its  specific  performance,  damages  may  be  recovered  for 
loss  or  injury  occasioned  by  its  breach.3 

§  247.  Legality  of  agreements  between  promoters  as  to 
formation  of  corporation  and  its  future  management  and  con- 
trol. —  There  is  no  principle  of  public  policy  which  forbids 
competent  parties  from  entering  into  an  agreement  to  form 
a  corporation  and  providing  for  its  future  management  and 
control,  if  the  corporation  is  created  according  to  statutory 
requirements,  and  the  objects  contemplated  are  lawful  and 
proper.  In  King  v.  Barnesf  the  bill  of  complaint  con- 
tained in  substance  the  following  allegations.  The  plain- 
tiffs and  the  defendant  B.  entered  into  a  parol  agreement 

1  Parkin  v.  Fry,  2  C.  &  P.  311 ;   Wilson  v.  Curzon,  15  M.  &  W.  532; 
Bailey  v.  Burgess,  48  N.  J.  Eq.  411. 

2  Crow  v.  Green,  4  Cent.  Rep.  (Penn.)  273. 
8  A  very  v.  Ryan,  74  Wise.  591. 

4  109  N.  Y.  267. 


248        PROMOTERS  AND   PROMOTION   OF  CORPORATIONS. 

to  the  effect  that  certain  real  estate  should  be  purchased  on 
joint  account,  the  parties  to  contribute  equally  thereto : 
that  a  corporation  should  be  organized  to  take  the  title,  the 
capital  stock  to  be  equally  divided  between  them.  B.  was 
made  agent  of  the  parties  for  the  purpose  of  buying  the 
property  and  organizing  the  corporation,  with  authority  to 
select  persons  temporarily  as  directors,  who  were  to  give 
place,  upon  request,  to  the  real  parties.  The  corporation 
was  organized  with  a  capital  of  $100,000  and  the  defend- 
ants P.,  C.,D.  and  G.,  together  with  B.,  were  made  directors. 
All  of  the  capital  stock  was  subscribed  for  by  B.,  except 
twenty  shares,  each  of  the  other  directors  subscribing  for 
five  shares.  Real  estate  was  purchased  by  the  associates 
for  $100,000  and  conveyed  to  the  corporation,  in  payment 
for  which  it  issued  its  entire  capital  stock.  This  was 
delivered  to  B.,  with  the  exception  of  the  twenty  shares 
taken  to  qualify  the  directors,  but  B.  refused  to  transfer  to 
the  plaintiffs  the  shares  which  they  were  entitled  to  under 
the  agreement,  contending  that  the  agreement  was  void  by 
the  statute  of  frauds,  as  creating  an  interest  in  real  estate 
by  parol ;  that  it  was  contrary  to  public  policy  and  without 
adequate  consideration  and  was  so  incomplete  and  uncer- 
tain in  its  terms  that  specific  performance  of  its  provisions 
could  not  be  decreed.  The  court  considered  these  objections 
to  be  untenable  ;  and  held  that  the  allegations  of  the  com- 
plaint presented  a  case  of  equitable  cognizance,  and  showed 
a  clear  case  for  an  accounting,  and  trial  of  all  issues  inci- 
dentally arising  upon  such  accounting. 

§  248.  Agreement  bet-ween  promoters  restricting  sale  of 
their  stock.  —  An  agreement  in  writing  between  the  promo- 
ters of  a  corporate  enterprise  owning  ninety-nine  one-hun- 
dredths  of  its  capital  stock  as  tenants  in  common  to  partition 
their  holdings  after  first  placing  in  the  treasury  one-fifth 
of  all  the  stock,  to  be  sold  to  provide  working  capital,  and, 


BIGHTS  AND   LIABILITIES   OF  PEOMOTEKS.  249 

in  order  to  prevent  a  sacrifice  thereof,  providing  for  the 
deposit  of  their  individual  stock  certificates  with  a  trust 
company,  each  agreeing  that  he  would  not  withdraw  the 
same  for  six  months  except  by  mutual  consent,  unless 
enough  treasury  stock  should  be  sooner  sold  to  realize  a 
sum  named,  in  which  event  any  one  could  withdraw  his 
certificates  on  five  days'  notice  to  the  others,  does  not  con- 
stitute an  unlawful  suspension  of  the  power  of  alienation, 
and  is  not  against  public  policy,  as  being  in  restraint  of 
trade.1 

1  Williams  v.  Montgomery,  148  N.  Y.  519. 


250        PROMOTERS  AND   PROMOTION   OF  CORPORATIONS. 


CHAPTER  XII. 


BIGHTS  AND  LIABILITIES  UNDER  CONTRACTS  MADE  BY  PRO- 
MOTERS CLAIMING  TO  BE  INCORPORATED  WHEN  THE  PRO- 
CEEDINGS TAKEN  TO  INCORPORATE  HAVE  BEEN  DEFECTIVE 
OR  ILLEGAL. 


§  249.  Question  as  to  consequences 
of  illegal  or  defective  in- 
corporation by  promoters. 

250.  Theory  that  corporation  can- 

not come  into  existence 
without  substantial  com- 
pliance with  enabling  stat- 
ute. 

251.  Conclusiveness  of  certificate 

of  incorporation. 

252.  Nature  and  attributes  of  a 

de  facto  corporation. 

253.  Promoters  and  stockholders 

of  a  de  facto  corporation 
not  liable  for  its  debts. 

254.  What  is  necessary  to  consti- 

tute a  de  facto  corporation. 

255.  A  valid  enabling  statute. 

256.  Color  of  apparent  organiza- 

tion under  statute  and  user. 

257.  Effect  of  apparently  real  but 

in  fact  sham  or  fraudulent 
compliance  with  require- 
ments of  statute. 

258.  Construction  of  statute  by 

courts  of  State  where  en- 
acted followed  by  courts 
of  other  States. 


§  259.  Incorporation  for  apparently 
lawful,  but  in  reality  un- 
lawful purpose,  will  not 
protect  promoters. 

260.  Rule      when      corporation 

formed  in  good  faith  for 
lawful  purpose. 

261.  Estoppel  to  deny  corporate 

existence.  Estoppel  of  the 
alleged  corporation. 

262.  Estoppel  of  stockholders  and 

promoters. 

263.  Estoppel  of  persons  dealing 

with  association  as  a  cor- 
poration. 

264.  Estoppel  to  deny  corporate 

existence  of  association  in 
order  to  hold  members  in- 
dividually liable  on  its 
contracts. 

265.  Eights  and  liabilities  under 

contracts  by  or  with  asso- 
ciation acting  as  a  corpo- 
ration, when  there  is  no 
estoppel  and  no  corporate 
existence  even  de  facto. 


§  249.  Question  as  to  consequences  of  illegal  or  defective 
incorporation  by  promoters.  —  The  subject  of  rights  and  lia- 
bilities under  contracts  made  by  promoters  in  behalf  of  a 
future  corporation  having  been  discussed  in  preceding 
chapters,  a  consideration  may  now  be  had  of  the  question 


RIGHTS   AND   LIABILITIES   UNDER  CONTRACTS.  251 

of  rights  and  liabilities  under  contracts  made  by  promoters 
claiming  to  be  incorporated  and  acting  professedly  as  a 
corporation,  but  without  a  de  jure  organization.  Enabling 
laws  under  which  a  corporation  may  be  formed  usually 
provide  that,  upon  compliance  with  specified  requirements, 
the  persons  seeking  to  incorporate  shall  become  a  corpora- 
tion. If  such  requirements  are  substantially  complied 
with,  a  corporation  de  jure  comes  into  being.  The  fact  of 
its  legal  existence  cannot  be  questioned,  even  by  the  State, 
although  the  State  may  for  lawful  cause  put  an  end  to  that 
existence  by  a  direct  proceeding  instituted  for  the  purpose.1 
Promoters  undertaking  to  bring  a  corporation  into  exist- 
ence for  the  purpose  of  doing  business  under  the  form  of 
corporate  organization  may,  however,  by  reason  of  some 
illegality,  irregularity,  defect,  or  omission  in  the  proceed- 
ings taken  under  the  enabling  law,  fail  to  form  a  corpora- 
tion de  jure,  and  yet  in  the  belief  that  they  have  acquired 
corporate  existence,  proceed  to  carry  on  business  as  a  cor- 
poration. In  such  case,  it  is  important  to  determine  what 
their  status  and  that  of  those  who  become  members  of  the 
supposed  corporation  is,  —  whether  for  any  purpose  or  as 
to  any  persons  they  may  be  treated  as  having  corporate 
existence,  and  if  not  what  are  their  rights  and  liabilities. 

§  250.  Theory  that  corporation  cannot  come  into  exist- 
ence without  substantial  compliance  with  enabling  statute.  — 
Probably  all  courts  would  agree  that  there  may  be  a  cor- 
poration de  facto  when  the  only  illegality  in  the  steps  taken 
to  incorporate  is  non-compliance  or  a  defective  compli- 

1  Eakright  v.  Logansport,  Sfc.  R.  R.  Co.,  13  Ind.  404;  Rogers  v. 
Danby  Universalist  Society,  19  Vt.  187;  State  v.  Central  Ohio  Mutual 
Relief  Ass'n,  29  Ohio  St.  399;  Buffalo  fr  Pittsburgh  R.  R.  Co.  v.  Hatch, 
20  N.  Y.  157;  Thompson  v.  People,  23  Wend.  537;  People  v.  Cheeseman, 
7  Col.  376;  Mokelumne  Hill  Mining  Co.  v.  Woodbury,  14  Cal.  424; 
People  v.  Stockton  fl-  Visalia  R.  R.  Co.,  45  Cal.  306. 


252        PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

ance  with  provisions  of  the  enabling  statute  which  are 
directory  or  in  the  nature  of  conditions  subsequent.  But 
there  are  cases  which  maintain  the  rule  that  requirements 
of  the  enabling  statute  other  than  those  which  are  merely 
directory  or  plainly  made  conditions  subsequent  are  to  be 
construed  as  conditions  precedent,  which  must  be  met 
before  a  corporation  can  in  law  or  in  fact  be  created,  pro- 
ceedings to  incorporate  under  the  statute  being  void  if  they 
do  not  meet  such  conditions.1  The  result  of  this  rule  is 
that  in  case  of  non-compliance  with  all  the  conditions  pre- 
cedent of  the  statute,  the  corporate  existence  may  be  at- 
tacked by  private  individuals.  "  It  is,"  said  the  Maryland 
court,  "  a  question  of  legal  birth.  If  the  corporation  had 
been  legally  born,  its  life  could  only  be  forfeited  and  its 
death  declared  at  the  instance  of  the  State  ;  but  whether 
it  ever  did  have  life,  or  in  other  words,  ever  was  born, 
seems  to  us,  upon  both  reason  and  authority,  open  to  in- 
quiry and  contest  at  the  instance  of  any  one  suffering  from 
its  unauthorized  acts."  2 

It  is  plain  that  the  statute  should  be  given  such  effect 
only  as  the  Legislature  intended.  When  the  statute  itself 
provides  that  omissions  or  irregularities  in  the  proceedings 
shall  render  the  incorporation  void,  or  subject  the  members 

1  Ferris  v.  Thaw,  72  Mo.  446  ;  Abbott  v.  Omaha  Smelting  Co.,  4  Neb. 
416  ;  Mokelumne  Hill  Mining  Co.  v.  Woodbury,  14  Cal.  424 ;  Hurt  v. 
Salisbury,  55  Mo.  311;  Boyce  v.  Trustees  of  Towsonton  Station  of  M.  E. 
Church,  46  Md.  359  ;  Bonaparte  v.  Baltimore,  Hampden,  $f  Lake  Roland 
R.  R.  Co.,  75  Md.  340;  Harrix  v.  McGregor,  29  Cal.  125;  Unity  Ins. 
Co.  v.  Cram,  43  N.  H.  636  ;  Bigelowv.  Gregory,  73  111.  197;  Walton  v. 
Oliver,  49  Kan.  107  ;  In  re  National  Debenture  §•  Assets  Co.  (1891),  2 
Ch.  505 ;  Childs  v.  Hurd,  32  W.  Va.  66 ;  Garnett  v.  Richardson,  35 
Ark.  144 ;  Montgomery  v.  Forbes,  148  Mass.  249 ;  Guckert  v.  Hacke, 
159  Penn.  303. 

3  Bonaparte  v.  Baltimore,  Hampden,  §•  Lake  Roland  R.  R.  Co.,  supra. 
In  Lord  v.  Essex  Building  Ass'n,  37  Md.  320,  it  was  held  that  a 
second  mortgagee  might  question  the  corporate  existence  of  the  first 
mortgagee. 


EIGHTS   AND   LIABILITIES   UNDEK    CONTRACTS.  253 

to  individual  liability,  there  is  no  room  for  question  as  to 
the  legislative  intent.  Such  is  the  case  in  Iowa,  where  the 
statute  provides  that  the  individual  property  of  the  mem- 
bers of  a  corporation  shall  be  liable  for  corporate  debts  in 
case  of  failure  substantially  to  comply  with  the  require- 
ments of  the  statute  as  to  organization  and  publicity.1  But 
in  the  absence  of  an  express  provision  of  such  nature,  should 
the  legislative  intent  so  to  provide  be  inferred  ?  The  prin- 
ciple of  construction  applied  by  the  courts  which  have 
adopted  the  rule  in  question  would  seem  to  be  that  some- 
times employed  in  the  case  of  a  statute  which  prohibits  an 
act,  but  imposes  no  penalty,  namely,  that  the  Legislature 
must  have  intended  to  make  the  prohibited  act  void,  as 
otherwise  the  law  would  be  simply  "  an  expression  of  legis- 
lative opinion  without  means  for  its  enforcement."  But 
the  case  of  the  exercise  of  corporate  franchises  under  an 
enabling  statute  without  a  compliance  with  all  its  require- 
ments is  to  be  distinguished  from  that  class  of  cases  in 
which  it  is  necessary  to  hold  prohibited  acts  or  acts  done 
without  a  compliance  with  prescribed  conditions  void  be- 
cause to  hold  otherwise  would  be  to  render  the  law  nugatory, 
there  being  no  other  way  to  enforce  it.  In  the  case  under 
consideration,  this  end  may  be  reached  by  a  better  and 
more  equitable  process.  The  proper  officers  of  the  State 
may,  by  quo  warranto  proceedings,  prevent  the  unlawful 
exercise  of  corporate  franchises.2 

It  is  therefore,  in  the  absence  of  express  provision  other- 
wise, reasonable  to  infer  that  this  is  the  sole  remedy 
intended  by  the  Legislature  when  corporate  franchises  are 

1  Iowa  Code,  sect.  1618  ;  Kaiser  v.  Lawrence  Savings  Bank,  56  Iowa, 
104  ;  Clegg  v.  Grange  Co.,  61  Iowa,  121.     See  also  the  Louisiana  Act, 
and  Field  v.  Cooks,  16  La.  Ann.  153. 

2  Elizabethtown   Gas  Co.   v.    Green,  46  N.  J.  Eq.  118 ;  Greene  v. 
People  (111.),  21  N.  E.  Rep.  605;  People  v.  Montecilo  Water  Co.,  97  Cal. 
276;  AtCy  Gen.  v.  Hanchett,  42  Mich.  436. 


254    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

exercised  by  virtue  of  an  organization  under  the  statute, 
but  without  a  full  or  substantial  compliance  with  all  its 
conditions ;  it  is  in  the  interest  of  the  public  so  to  hold, 
and  the  wrong  being  to  the  State,  and  not  to  private 
individuals,  if  redress  is  to  be  sought  it  should  be  only  at 
the  instance  of  the  State.1 

§  251.  Conclusiveness  of  certificate  of  incorporation.  — 
General  laws  authorizing  the  formation  of  corporations 
upon  performance  of  stated  conditions  sometimes  contain  a 
provision  for  the  issue  of  a  certificate  of  incorporation  by 
a  public  officer  designated  for  the  purpose.  In  such  case, 
notwithstanding  non-performance  of  conditions  or  fraudu- 
lent or  evasive  compliance  therewith,  the  certificate,  if 
issued,  may,  even  under  the  strict  theory  stated  in  the 
preceding  section,  be  conclusive  as  to  the  existence  of  the 
corporation  against  all  persons  but  the  State.2  The  con- 
clusiveness  of  a  certificate  of  incorporation,  however,  under 
the  theory  in  question,  must  depend  upon  the  language  of 
the  statute  under  which  it  is  issued,  and  it  may  be  conclu- 
sive as  to  some  things  and  not  as  to  others.  The  English 
Companies  Act,  1862,  provides  that  u  any  seven  or  more 
persons  associated  for  any  lawful  purpose  may,  by  subscrib- 
ing their  names  to  a  memorandum  of  association,  and 
otherwise  complying  with  the  requirements  of  this  Act  in 
respect  of  registration,  form  an  incorporated  company"; 
and  that "  A  certificate  of  the  incorporation  of  any  company, 
given  by  the  registrar,  shall  be  conclusive  evidence  that  all 

1  Thus,  when  a  corporation  takes  a  conveyance  of  land  without 
complying  with  statutory  requirements  made  conditions  precedent  to 
the  right  so  to  do,  the  conveyance  is  good  unless  the  legislative  intent 
is  expressed  to  make  it  void  for  lack  of  such  compliance,  and  the  State 
alone  can  take  action  in  the  matter.     Fritts  v.  Palmer,  132  U.  S.  282; 
American  Mortgage  Co.  of  Scotland  v.  Ternille,  87  Ga.  28. 

2  See  Rice  v.  Nat' I  Bank  of  the  Commonwealth,  126  Mass.  300  ;  Boston 
Rubber  Shoe  Co.  v.  Boston  Rubber  Co.,  149  Mass.  436. 


EIGHTS   AND   LIABILITIES   UNDER   CONTRACTS.  255 

requisitions  of  this  Act  in  respect  of  registration  have  been 
complied  with."  In  In  re  National  Debenture  and  Assets 
Corporation,1  it  was  held  that  a  certificate  of  incorporation 
under  the  Act  in  question  was  not  conclusive  that  seven 
persons  had  signed  the  memorandum  of  association,  and 
therefore  conclusive  of  the  existence  of  the  corporation. 
The  memorandum  in  this  case  purported  to  bear  the  sub- 
scription of  the  names  of  seven  persons  ;  it  was  alleged, 
however,  that  in  fact  it  had  been  signed  by  six  persons 
only,  as  one  of  the  signatories  had  signed  twice,  once  in  his 
own  name  and  once  under  an  assumed  name.  "  The  certifi- 
cate of  the  registrar,"  said  Bowen,  L.  J.,  "  cannot  cover  a 
fatal  blot  which  is  caused  by  a  smaller  number  of  persons 
purporting  to  form  a  corporate  body  than  the  Act  of  Par- 
liament requires.  That  is  clear  by  the  language  of  sect.  6 
and  sect.  18  of  the  Act  of  1862.  Sect.  6  provides  that 
seven  or  more  persons  may  form  a  company.  How  ?  By 
subscribing  their  names  to  a  memorandum  of  association, 
and  otherwise  complying  with  the  requisitions  of  this  Act. 
It  does  not  say  less  persons  than  seven  will  do.  What  does 
it  mean  by  the  seven  persons  complying  with  the  requisi- 
tions of  the  Act  ?  It  means  that  they  are  to  do  that  which 
is  prescribed  by  sects.  17  and  18.  Sect.  18  says, 'A  cer- 
tificate .  .  .  shall  be  conclusive  evidence  that  all  the  requi- 
sitions of  this  Act  in  respect  to  registration  have  been 
complied  with.'  Amongst  others  there  is  the  requisition 
that  seven  persons  shall  subscribe  their  names.  It  does 
not  say  that  less  than  seven  persons  can  do  it."  2 

In  the  United  States  Banking  Act,  it  is  provided  that 
when  the  Comptroller  shall  give  a  banking  association  a 

1  (1891)  2  Ch.  505. 

2  See  also  W.  Laxon  Co.  No.  2  (1892),  3  Ch.  555.     Compare  Bird's 
Case,  1  Sim.  (K.  s.)  47;  Peel's  Case,  2  Ch.  674;  Oakes  v.  Turquand, 
L.  B.  2  H.  L.  325. 


256    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

certificate  that  the  requirements  of  the  Act  have  been  com- 
plied with,  the  association  shall  have  the  powers  of  a  bank 
under  the  Act,  and  may  begin  business  as  a  corporation. 
It  has  been  held  that  the  Comptroller's  certificate  is  conclu- 
sive as  against  a  stockholder  in  a  suit  to  enforce  his  liabil- 
ity, and  as  against  a  party  upon  his  contract  with  the  bank.1 
§  252.  Nature  and  attributes  of  a  de  facto  corporation.  — 
The  better  view,  whether  the  statute  does  or  does  not  pro- 
vide for  the  issue  of  a  certificate  of  incorporation,  and  the 
one  sustained  by  the  weight  of  modern  authority,  although 
some  courts  of  high  authority,  as  we  have  seen,  do  not  ac- 
cede to  it,  is  that  while  a  corporation  de  jure  cannot  result 
from  anything  short  of  a  substantial  compliance  with  all 
the  conditions  of  the  enabling  law,  a  corporation  de  facto 
may  arise  from  an  incomplete,  defective,  or  irregular  com- 
pliance with  such  conditions,  whether  they  are  mandatory 
or  directory,  conditions  precedent  or  conditions  subsequent. 
A  de  facto  corporation  is  one  which  is  illegal  or  illegitimate 
by  reason  of  some  omission,  defect,  or  irregularity  in  the 
proceedings  taken  under  the  enabling  law,  but  neverthe- 
less has  in  fact  come  into  being,  and  accordingly  must 
be  treated  as  existent  until  its  existence  is  questioned  by 
the  State  in  a  direct  proceeding  brought  for  that  purpose.2 
So  long  as  the  State  acquiesces  in  its  existence  and  exercise 
of  corporate  functions,  it  is  under  the  protection  of  the  same 
law  and  governed  by  the  same  legal  principles  as  a  corpora- 

1  Casey  v.  Galli,  94  U.  S.  673. 

2  Whitney  v.  Wyman,  101  U.  S.  392 ;  Mackall  v.  Chesapeake  Canal 
Co.,  94  U.  S.  308  ;   Supreme  Court  of  Independent  Order  of  Foresters 
of  Canada  v.  Supreme  Court  of  United  Order  of  Foresters  (Wise.,  1896), 
68  N.  W.  Rep.  1011;  Me  Clinch  v.  Sturais,  72  Me.  295;  Hamilton  v. 
Clarion  R.  R.  Co.,  144Peun.  34;  North  v.  State,  107  Tnd.  356  ;  Duggan 
v.  Colorado  Mortgage  and  Investment  Co.,  11  Col.  113;  Tarbellv.  Page, 
24  111.  46;  Lehman  v.  Warner,  61  Ala.  455;  Finch  v.  Ullman,  105  Mo. 
255;  Saunders  v.  Farmer,  62  N.  H.  572.     See  also  cases  cited  infra, 
note  1,  page  200. 


EIGHTS   AND   LIABILITIES   UNDER   CONTRACTS.  257 

tion  de  jure.1  "  A  corporation  de  facto"  said  the  California 
court,2  "  may  legally  do  and  perform  every  act  and  thing 
which  the  same  entity  could  do  or  perform  were  it  a  de  jure 
corporation.  As  to  all  the  world  except  the  paramount 
authority  under  which  it  acts,  and  from  which  it  receives 
its  charter,  it  occupies  the  same  position  as  though  in  all 
respects  valid ;  and  even  as  against  the  State,  except  in 
direct  proceedings  to  arrest  its  usurpation  of  power,  it  is 
submitted,  its  acts  are  to  be  treated  as  efficacious." 

The  assumption  and  exercise  of  corporate  functions 
under  an  imperfect  or  irregular  compliance  with  the  con- 
ditions of  the  statute  is  a  wrong  to  the  State  alone,  and 
does  not  concern  individuals  as  such,  unless  the  Legislature 
provides  otherwise.  In  the  absence  of  a  declaration  in  the 
statute  itself  that  a  failure  to  comply  with  all  the  condi- 
tions specified  shall  render  any  attempt  to  incorporate 
thereunder  absolutely  void,  or  of  some  other  declaration  of 
similar  nature  or  to  the  same  effect,  it  is  the  exclusive  pre- 
rogative of  the  State  to  elect  whether  to  waive  or  to  insist 
upon  the  conditions.  If  a  private  individual  could  raise  the 
question,  the  State's  sole  prerogative  of  waiver  would  be 
destroyed.  Moreover,  as  the  Alabama  court  has  said,  "  it 
would  produce  only  disorder  and  confusion,  and  embarrass 
and  endanger  the  rights  and  interests  of  all  dealing  with  the 
association,  if  the  legality  of  its  existence  could  be  drawn 
in  question  in  every  suit  to  which  it  was  a  party,  or  in 
which  rights  were  involved  springing  out  of  its  corporate 
existence.  No  judgment  could  be  rendered  which  could 
settle  the  question  finally.  But  when  the  government 
intervenes  by  an  appropriate  proceeding,  the  judgment  is 
final  and  conclusive,  putting  an  end  to  controversy."  3 

1  Snider' s  Sons'  Co.  v.  Troy,  91  Ala.  224. 

2  People  v.  La  Rue,  67  Cal.  530. 

8  Central  Agricultural  Sf  Mechanical  Association  v.  Alabama  Gold 

17 


258        PROMOTERS   AND   PROMOTION  OF   CORPORATIONS. 

§  253.  Promoters  and  stockholders  of  a  de  facto  corpora- 
tion not  liable  for  its  debts.  —  Tt  follows  from  what  has  been 
said  as  to  the  nature  and  attributes  of  a  de  facto  corporation 
that  promoters  and  others  who  are  members  of  such  a  cor- 
poration, or  who  act  and  contract  in  its  name  and  behalf, 
cannot  be  held  individually  liable  for  the  corporate  debts, 
in  the  absence  of  an  express  statutory  provision  imposing 
such  liability.1 

§  254.  What  is  necessary  to  constitute  a  de  facto  corpora- 
tion. —  The  logic  of  the  theory  that  the  State  alone  is  con- 
cerned in  a  case  of  an  unlawful  assumption  of  corporate 
functions  would  seem  to  lead  to  the  conclusion  that  per- 
sons who  in  fact  act  as  a  corporation  must  in  all  cases 
without  exception  be  treated  as  a  corporation,  until  the 
State  intervenes.  But  the  courts  have  not  gone  so  far  as 
this,  and  there  is  reason  for  holding  that  there  should  be 
some  limitation.  "  We  must  not,"  as  Judge  Thompson 
observes,  "  get  too  far  away  from  the  primal  proposition 
that  the  Legislature  alone  can  create  a  corporation,  and 
that  a  collection  of  individuals  cannot  make  themselves  a 
corporation  by  merely  resolving  to  be  such  or  calling 
themselves  such."  2  Accordingly,  in  order  to  create  a  cor- 

Life  Ins.  Co.,  70  Ala.  120.  But  the  rule  would  not  apply  against  a 
subscriber  for  stock  in  a  future  corporation.  It  is  an  implied  condition 
of  such  a  contract  that  the  corporation  shall  be  created  de  jure.  Rick- 
hoff\.  Brown's  Sewing  Machine  Co.,  68  Ind.  388  ;  Schloss  v.  Trade  Co., 
87  Ala.  411;  Columbia  Electric  Co.  v.  Dixon,  46  Minn.  463. 

1  Stout  v.  Zulick,  48  N.  J.  L.  600;  Cochran  v.  Arnold,  58  Penn. 
399;  Duggan  v.   Colorado  Investment   Co.,  11  Col.  113;  Vanneman  v. 
Young,  52  N.  J.  L.  403;  Snider's  Sons'  Co.  v.  Troy,  91  Ala.  224;  Gart- 
side  Coal  Co.  v.  Maxwell,  22  Fed.  Rep.  197;   Whitney  v.  Wyman,  101 
U.  S.  392;  Earned  v.  Real,  65  N.  H.  184  ;  Finnegan  v.  Knights  of  Labor 
Building  Ass'n,  52  Minn.  239;  American  Salt  Co.  v.  Heidenheimer,  80 
Tex.  344. 

2  Thompson  on  Corporations,  sect.  502.     Pettis  v.  Atkins,  60  111. 
454.    "  To  give  to  a  body  of  men  assuming  to  act  as  a  corporation 


EIGHTS   AND   LIABILITIES   UNDER   CONTRACTS.  259 

poration  de  facto  it  is  held  to  be  necessary  that  there  should 
be  a  statute  under  which  the  corporation  might  lawfully  be 
formed,  some  steps  taken  to  form  the  corporation  under 
that  statute,  and  user  of  the  corporate  franchises  assumed. 
If  there  is  no  enabling  statute,  there  cannot  be  a  corpora- 
tion, for  a  corporation  can  exist  only  by  legislative  sanc- 
tion. If  there  is  no  attempt  at  incorporation  under  the 
statute,  there  can  be  no  valid  claim  that  a  corporation  has 
been  formed  under  it.  And  if  there  is  not  a  corporation  in 
law,  there  can  be  none  in  fact,  unless  there  is  an  exercise 
of  corporate  functions. 

§  255.  A  valid  enabling  statute.  —  There  must  be  a  stat- 
ute under  which  the  corporation  might  have  been  formed.1 
And  the  statute  must  be  a  valid  one.  Accordingly,  an 
unconstitutional  statute  will  not  suffice.2  But  it  has  been 
held  that  an  attempted  incorporation  under  a  special  act 
which  is  unconstitutional  may  give  rise  to  a  corporation  de 
facto,  if  there  is  a  general  law  under  which  the  corporation 
might  lawfully  have  been  formed.3 

§  256.  Color  of  apparent  organization  under  statute  and 
user.  —  There  must  be  color  of  apparent  organization  under 
the  statute  in  order  that  the  corporation  may  exist  de  facto 

where  there  has  been  no  attempt  to  comply  with  the  provisions  of  any 
law  authorizing  them  to  become  such,  the  status  of  a  de  facto  cor- 
poration might  open  the  door  to  frauds  upon  the  public,  and  it  would 
certainly  be  impolitic  to  permit  a  number  of  men  to  have  the  status  of 
a  corporation  because  there  is  a  law  under  which  they  might  have  be- 
come incorporated,  and  they  have  agreed  among  themselves  to  act,  and 
they  have  acted,  as  a  corporation."  Finnegan  v.  Knights  of  Labor 
Building  Ass'n,  52  Minn.  239. 

1  Evenson  v.  Ellingson,  67  Wise.  634;  Chicora  Co.  v.  Crews,  6  S.  C. 
243  ;  American  Loan  if  Trust  Co.  v.  Minnesota  §•  N.  W.  R.  R.  Co.,  157 
111.  641 ;  State  v.  Critchett,  37  Minn.  13. 

2  Eaton  v.  Walker,  76  Mich.  579  ;  Bradenstein  v.  Hoke,  101  Cal.  131 ; 
Re  Mendenhall,  9  Nat.  Bank  Reg.  497 ;   Vredenburg  v.  Behan,  33  La. 
Ann.  627.     Contra,  Coxe  v.  State,  144  N.  Y.  396. 

8  McTighe  v.  Macon  Construction  Co.,  94  Ga.  306. 


260        PROMOTERS   AND   PROMOTION  OF  CORPORATIONS. 

under  that  statute.  The  promoters  must  take  proceedings 
under  the  statute  to  such  an  extent  as  unequivocally  to  indi- 
cate that  their  organization  is  really  intended  and  attempted 
to  be  in  pursuance  of  the  statute,  by  virtue  of  which  alone 
they  can  acquire  corporate  existence.  When  this  appears, 
although  neither  full  nor  substantial  compliance  with  all 
the  conditions  of  the  statute  is  shown,  and  although  there 
may  have  been  a  failure  as  to  some  substantial  requirement, 
color  of  apparent  organization  under  the  statute  is  made 
manifest,  and  if  the  statute  is  valid  and  authorizes  the  for- 
mation of  the  corporation,  and  there  is  user  pursuant  to 
the  organization,  a  corporation  de  facto  is  created.1 

Thus  in  Duggan  v.  Colorado  Mortgage  $•  Investment  (70., a 
the  promoters  took  various  steps  under  the  statute  to 
organize  a  corporation,  and  proceeded  to  do  business  as  a 
corporation.  But  their  articles  were  not  acknowledged, 
as  the  statute  required.  And  although  the  articles  pur- 
ported to  be  signed  by  three  persons,  the  statute  requiring 
at  least  three,  it  was  offered  to  show  that  one  of  the  sig- 
natures was  a  forgery.  It  was  held  that  there  was  a  de 
facto  corporation,  the  court  saying :  "  We  are  aware  of 

1  Vanneman  v.  Young,  52  N.  J.  L.  403 ;  Stout  v.  Zulick,  48  N.  J.  L. 
601;  Finnegan  v.   Knights  of  Labor  Building  Ass'n,   52   Minn.   239; 
Duggan  v.  Colorado  Mortgage  Sf  Investment  Co.,  11  Col.  113;  McTighe 
v.  Macon  Construction  Co.,  94  Ga.  306  ;  Snider's  Sons'  Co.  v.  Troy,  91 
Ala.  224  ;  Hudson  v.  Green  Hid  Seminary,  113  111.  618;  Bushnell  v. 
Consolidated  Ice  Machine  Co.,  138  111.  67;  Methodist,   fyc.   Church  v. 
Pickett,  19  N.  Y.  482 ;  Buffalo  §•  Allegheny  R.  R.  Co.  v.  Gary,  26  N.  Y. 
75;  People  v.  Montecito   Water  Co.,  97  Cal.  276;   Allen  v.  Long,  80 
Tex.  261;  Hassleman  v.  U.  S.  Mortgage  Co.,  97  Ind.  368  ;   Society  of 
Perun  v.  Cleveland,  43  Ohio  St.  481 ;   Haas  v.   Bank  of  Commerce,  41 
Neb.  754 ;  Pape  v.  Capital  Bank,  20  Kan.  440  ;  Merriman  v.  Magiveny, 
12  Heisk.  (Tenn.)  494;  Lamning  v.  Galusha,  81  Hun,  247;  Supreme 
Court  of  Independent  Order  of  Foresters  of  Canada  v.  Supreme   Court 
of  United  Order  of  Foresters  (Wise.,  1896),  68  N.  W.  Rep.  1011 ;  Clark 
on  Corporations,  pp.  90,  94. 

2  11  Col.  113. 


EIGHTS   AND   LIABILITIES   UNDEK  CONTRACTS.  261 

the  distinctions  between  mere  omissions  or  irregularities 
and  what  are  called  '  prerequisites  of  the  statutes. '  The 
distinction  may  well  be  taken  in  a  direct  proceeding,  or 
other  exceptional  case  where  strict  proof  is  required. 
What  is  or  is  not  a  prerequisite  is  often  a  difficult  ques- 
tion for  a  professional  man,  and  much  more  for  a  layman, 
to  determine.  To  cast  such  a  burden  upon  the  public  as 
between  the  individual  members  is  to  lose  sight  of  the 
reason  for,  and  largely  abrogate,  the  salutary  rule  respect- 
ing de facto  corporations. "  In  Society  Perun  v.  Cleveland^ 
the  certificate  of  incorporation  filed  by  the  promoters  did 
not  state  the  manner  of  carrying  on  the  proposed  business 
as  required  by  the  statute.  In  Finnegan  v.  Knights  of  Labor 
Building  Association*  the  articles  filed  did  not  meet  the 
condition  of  the  statute  that  the  place  of  business  should 
be  set  forth.  But  in  both  cases  the  court  held  that  there 
was  a  corporation  de  facto.  The  same  conclusion  was 
reached  in  East  Norway  Lake  Church  v.  Froislie, 3  where 
the  certificates  of  incorporation  were  not  properly  executed, 
acknowledged,  or  recorded,  as  prescribed  by  the  statute. 

8  257.  Effect  of  apparently  real,  but  in  fact  sham  or 
fraudulent  compliance  with  requirements  of  statute.  —  It  is 
held  by  some  courts  to  be  essential  to  the  existence  of  a 
corporation  de  facto  that  the  attempt  to  incorporate  un- 
der the  statute  shall  have  been  made  in  good  faith,  and 
that  when  there  has  been  an  apparently  real,  but  in  fact 
merely  pretentious,  sham,  or  evasive  compliance  with 
the  requirements  of  the  statute,  the  lack  of  good  faith 
or  fraud,  in  the  absence  of  a  conclusive  certificate  of 
incorporation,  vitiates  the  proceedings,  and  a  corporation 
de  facto  is  not  created.  Thus,  in  Montgomery  v.  Forbes,4 
the  question  of  the  existence  of  a  corporation  under  the 

1  43  Ohio  St.  481.  8  37  Minn.  447. 

2  52  Minn.  239.  4  148  Mass.  249. 


262    PROMOTERS  AND  PROMOTION  OF  CORPORATIONS. 

New  Hampshire  statute  was  raised.  Under  this  statute, 
"  any  five  or  more  persons  of  lawful  age  may,  by  written 
articles  of  agreement,  associate  together  for  carrying  on 
any  lawful  business,  except  banking  and  the  construction 
and  maintenance  of  a  railroad,  and  when  such  articles 
have  been  executed  and  recorded  in  the  office  of  the  clerk 
of  the  town  in  which  the  principal  business  is  to  be  car- 
ried on,  and  in  that  of  the  Secretary  of  State,  they  shall 
be  a  corporation. "  "  The  object  for  which  the  corporation 
is  established,  the  place  in  which  the  business  is  to  be 
carried  on,  and  the  amount  of  the  capital  stock  to  be  paid 
in,  shall  be  distinctly  set  forth  in  the  articles  of  agree- 
ment. "  It  appeared  that  the  defendant,  who  was  a  woollen 
manufacturer  in  Massachusetts,  for  the  purpose  of  limit- 
ing his  personal  responsibility  and  because  the  laws  of 
New  Hampshire  were  more  favorable  to  corporations  than 
Massachusetts  laws,  went  to  Nashua,  New  Hampshire,  to 
form  a  corporation  through  which  to  carry  on  his  busi- 
ness. With  a  local  attorney  and  three  other  persons  se- 
cured by  the  attorney,  he  executed  articles  of  agreement 
which  were  recorded  in  the  office  of  the  clerk  of  the  city  of 
Nashua  and  in  the  office  of  the  Secretary  of  State.  These 
articles  recited  that  the  subscribers  associated  themselves 
for  the  purpose  of  forming  a  corporation  to  be  called  the 
Forbes  Woollen  Mills,  fixed  the  amount  of  the  capital 
stock,  and  stated  that  the  object  of  the  corporation 
was  to  manufacture  and  sell  woollen  and  other  goods, 
and  the  places  of  business  were  at  Nashua,  N.  H.,  and  East 
Brookfield,  Mass.  Meetings  of  the  subscribers  were  sub- 
sequently held,  at  which  the  defendant  was  elected  presi- 
dent and  treasurer,  and  such  other  officers  were  elected  as 
were  necessary  under  the  laws  of  New  Hampshire.  All 
the  stock  was  issued  to  the  defendant,  no  other  person 
being  interested  in  it.  The  corporation  then  began  the 


EIGHTS   AND  LIABILITIES   UNDER   CONTRACTS.  263 

manufacture  of  woollen  goods  in  East  Brookfield,  and 
purchased  supplies  of  the  plaintiff,  for  which  the  notes  of 
the  corporation  were  given  and  taken.  There  was  no 
manufacturing  done  in  Nashua,  nor  any  other  business, 
except  the  holding  of  corporate  meetings  In  the  trial 
court  the  jury  found  that  at  the  time  of  the  attempted 
organization  the  alleged  corporation  and  its  members  did 
not  intend  to  carry  on  its  business  (other  than  holding 
meetings)  in  whole  or  in  part  in  Nashua;  that  there  was 
no  attempt  in  good  faith  by  the  defendant  to  form  the 
corporation;  but  that  the  defendant  believed  that  the 
organization  was  a  valid  corporation.  The  suit  was  to 
recover  from  the  defendant  individually  the  price  of  the 
supplies  in  question,  and,  on  the  findings  stated,  the  judge 
directed  a  verdict  for  the  plaintiff,  which  was  sustained. 

In  Jersey  City  Gas  Co.  v.  D wight,1  the  plaintiff  corpora- 
tion sought  to  be  protected  against  an  invasion  of  its 
franchise.  It  had  authority  under  a  special  charter  to  lay 
gas  pipes  in  the  streets  of  Jersey  City,  and  to  generate 
and  sell  gas  for  lighting  purposes  in  that  city.  The  de- 
fendants claimed  the  same  right,  as  a  corporation  formed 
by  them  under  the  name  of  the  Consumers'  Gas  Company, 
pursuant  to  the  provisions  of  a  general  law.  The  decision 
hinged  on  the  question  whether  the  defendants  had 
acquired  corporate  existence.  The  law  in  question  pro- 
vided that  a  corporation  formed  under  it  should  exist 
from  the  filing  of  the  articles,  but  that  the  articles  should 
not  be  filed  until  at  least  one-half  of  the  capital  stock  had 
been  subscribed,  and  twenty  per  cent  paid  thereon  in 
good  faith  and  in  cash,  and  an  affidavit  of  compliance 
with  such  requirement  filed.  There  was  an  ostensible 
compliance  on  the  part  of  the  defendants,  but  in  fact  a 
part  of  the  subscription  of  one-half  of  the  capital  stock 

*  29  N.  J.  Eq.  242. 


264         PEOMOTEES   AND    PEOMOTION   OF   COEPOEATIONS. 

was  fictitious,  and  the  required  twenty  per  cent  was  not 
paid  in  in  cash,  although  an  affidavit  to  that  effect  was 
filed.  The  court  said:  "Any  attempt  to  acquire  corpo- 
rate functions  by  a  pretentious  or  evasive  compliance, 
no  matter  what  the  papers  may  say,  must  be  denounced 
as  a  fraud  upon  the  law.  By  this  law  a  corporation  is 
made  self-creative  and  a  grant  of  a  franchise  is  made  to 
flow  from  the  act  of  the  grantee ;  the  act  is  the  grant,  but 
to  have  this  effect  it  must  be  what  the  law  requires,  and 
not  a  sham."  The  defendants,  it  was  accordingly  held, 
had  not  acquired  corporate  life  and  power,  and  an  injunc- 
tion was  issued  restraining  them  from  using  the  public 
streets  of  Jersey  City  for  the  purpose  of  laying  gas  pipes 
therein. 1 

But  the  principles  on  which  the  rule  in  relation  to  a 
corporation  de  facto  is  based  apply  with  peculiar  force 
when  private  individuals  seek  to  impeach  the  existence  of 
a  corporation  on  the  ground  of  fraud  or  lack  of  good  faith 
in  the  proceedings  taken  to  secure  incorporation.  If 
defects  and  omissions  in  the  proceedings  which  are 
apparent  of  record  and  may  easily  be  ascertained,  and  the 
effect  of  which  is  a  question  of  law,  can  be  taken  advan- 
tage of  only  by  the  State,  a  fortiori  should  this  be  so  in  a 
case  of  alleged  fraud  or  lack  of  good  faith  which  presents 
a  question  of  fact  in  respect  to  which  prospective  stock- 
holders or  others,  however  honest  or  diligent,  might 
reach  the  wrong  conclusion  and  different  juries  might 
decide  differently.  In  one  case  as  much  as  in  the  other 
the  wrong  is  to  the  State,  and  not  to  individuals,  and  it 
should  rest  with  the  State  alone  to  raise  the  question.2 

1  To  the  same  effect,  see  Farnham  v.  Benedict,  107  N.  Y.  159  ;  Hill 
v.  Beach,  12  N.  J.  Eq.  31. 

2  Charles  River  Bridge  Co.  v.    Warren  Bridge,  7  Pick.  344;  Dug- 
gan  v.  Colorado  Mortgage  Sf  Investment  Co.,  11  Col.  113 ;  Demarest  v. 
Flack,  128  N.  Y.  205. 


EIGHTS   AND   LIABILITIES   UNDER   CONTEACTS.  265 

The  difficulties  in  the  way  of  the  contrary  doctrine  and 
the  confusion  which  might  result  from  its  adoption  are 
set  forth  in  the  opinion  of  the  court  in  Cochran  v.  Arnold,1 
as  follows :  "  By  one  jury  a  charter  may  be  set  aside.  By 
another  it  may  be  sustained.  One  creditor  may  sue  the 
corporation  as  such,  obtain  a  judgment,  and  sell  its  land, 
himself  becoming  the  purchaser.  Another  creditor  may 
sue  the  corporators,  alleging  that  their  charter  is  null, 
furnishing  no  immunity  to  them.  He  may  obtain  a 
judgment  and  sell  the  same  land  to  another  purchaser,  as 
the  property,  not  of  the  corporation,  but  of  the  stock- 
holders. In  such  a  case  which  purchaser  would  hold  the 
title  ?  Again,  new  stockholders  may  come  in,  totally 
ignorant  of  any  fraud  or  mistake  in  making  out  the  cer- 
tificate. Are  they  to  be  charged  individually  because 
there  was  a  secret  vice  in  obtaining  corporate  being? 
That  would  be  monstrous.2  .  .  .  Yet,  if  a  charter  can 
be  shown  invalid  by  collateral  attack  at  the  suit  of  a 
creditor,  why  are  not  new  stockholders  who  have  come  in 
after  the  birth  of  the  corporation  equally  liable  as  partners, 
or  joint  contractors,  with  all  the  original  stockholders  ? 
Can  the  charter  be  effective  and  yet  not  effective  ?  In 
Patterson  v.  Arnold,3  it  seems  to  have  been  thought  a 
charter  may  be  good  as  to  some  stockholders  and  a  nullity 
as  to  others.  What  confusion  must  this  produce  ?  Some 
may  be  sued  as  partners,  and  others  through  the  corpora- 
tion, and  under  judgments  obtained  executions  be  levied 
upon  the  same  property.  Or  all  the  original  stockholders 

1  58  Perm.  399. 

2  There  are  cases  which,  while  recognizing  the  doctrine  that  the 
corporate    existence  may  be   impeached  by   private   individuals   as 
against  the  guilty  parties,  hold  otherwise  as  to  innocent  stockholders. 
A  merican  Salt  Co.  v.  Heidenheimer,  80  Tex.  344 ;  Medill  v.  Collier,  16 
Ohio  St.  599. 

8  45  Penn.  410. 


266        PBOMOTEES  AND   PROMOTION   OF  COEPOEATIONS. 

may  go  out  and  give  place  to  successors.  Then  that 
which  was  incurably  vicious,  because  an  usurpation  upon 
the  Commonwealth,  has  become  good.  It  is  impossible, 
however,  that  a  charter  can  be  good  as  to  some  stock- 
holders and  bad  as  to  others.  Every  one  has  an  interest 
in  the  property  of  his  associates  invested  in  the  common 
stock.  Such  is  his  corporate  right.  If  that  property  can 
be  withdrawn  by  action  against  his  associates  individually, 
the  charter  ceases  to  be  to  him  all  that  it  purports  to  be. 
It  is  said,  that  those  who  certify  falsely  for  the  purpose 
of  obtaining  a  charter  are  guilty  of  fraud.  Doubtless  this 
is  so.  There  is  a  fraud  upon  the  State.  If  it  be  also  a 
fraud  upon  creditors,  the  law  furnishes  a  remedy.  An 
action  will  lie  for  the  fraud.  But  to  deny  the  corporate 
existence  of  a  de  facto  corporation,  and  to  hold  as  partners 
those  who  were  guilty  of  fraud  in  obtaining  the  charter, 
is  to  confound  an  action  ex  contractu  with  one  essen- 
tially for  a  tort." 

§  258.  Construction  of  statute  by  courts  of  State  where 
enacted  followed  by  courts  of  other  States.  —  When  a  court 
in  one  State  has  to  determine  the  interpretation  to  be 
placed  upon  a  statute  of  another  State  authorizing  the 
formation  of  corporations,  it  will  inquire  whether  the 
courts  of  the  latter  State  have  construed  it.  If  they  have 
passed  on  the  question  whether  given  omissions  or  defects 
in  the  proceedings  required  for  incorporation  render  an 
attempted  incorporation  under  the  statute  void,  the  courts 
of  the  State  in  which  the  existence  of  a  corporation  alleged 
to  have  been  formed  under  the  statute  in  question  is 
denied  will,  pursuant  to  the  rule  of  comity,  follow  the 
construction  adopted  by  the  courts  of  the  State  where 
the  statute  was  enacted.  Therefore ,  when  an  action  was 
brought  in  the  State  of  New  York  against  certain  stock- 
holders of  a  company  purporting  to  have  been  incorporated 


EIGHTS   AND  LIABILITIES  UNDER   CONTKACTS.  267 

in  the  State  of  Iowa,  seeking  to  charge  such  stockholders 
with  an  indebtedness  of  the  company,  on  the  ground  that 
its  failure  to  file  its  charter  in  the  office  of  the  Secretary 
of  State  as  required  by  the  Iowa  statute  had  rendered  the 
incorporation  void,  it  appearing  that  the  Supreme  Court 
of  Iowa  had  decided  that  such  filing  was  not  essential  to 
the  validity  of  the  incorporation,  and  that  the  omission  to 
cause  the  charter  to  be  so  filed  would  not  render  the 
private  property  of  the  stockholders  liable  for  the  debts 
of  the  company,  it  was  held  by  the  New  York  court  that 
such  decision  was  conclusive  as  to  the  construction  to  be 
placed  on  the  statute,  and  that  the  action  was  not  main- 
tainable.1 

§  259.  Incorporation  for  apparently  lawful,  but  in  reality 
unlawful  purpose,  will  not  protect  promoters.  —  Promoters 
may  bring  a  corporation  into  existence  for  the  purpose  of 
doing  some  unlawful  act  or  carrying  on  some  unlawful 
business  under  the  form  of  corporate  organization  as  a 
shield  against  personal  liability.  In  such  case,  they  may 
be  held  responsible  as  individuals  for  their  wrong  doing, 
although  it  is  accomplished  through  the  medium  of  the 
corporation.  The  articles  of  association  or  charter  may 
indicate  that  the  purpose  of  the  corporation  is  lawful,  but 
the  courts  will  not,  if  it  is  proved  that  the  real  intent  is 
to  transact  an  unlawful  business,  and  such  business  is 
transacted  by  the  promoters,  permit  them  when  sued  as 
individuals  to  shelter  themselves  behind  the  answer  of 
corporate  organization.  The  corporation  may  have  a 
legal  existence,2  as  a  de  facto  corporation,  but  of  that  the 
wrong  doers  cannot  avail  themselves. 

1  Jessup  v.  Carnegie,  80  N.  Y.  441. 

8  The  distinction  between  calling  in  question  the  existence  of  a 
corporation  and  refusing  to  permit  its  existence  to  be  availed  of  in  a 
case  of  the  nature  stated  must  be  borne  in  mind.  It  is  evidently  the 


268        PROMOTERS   AND   PROMOTION  OF  CORPORATIONS. 

McG-rew  v.  City  Produce  Exchange1  exemplifies  the 
rule.  In  this  case  the  plaintiff  brought  suit  to  recover 
moneys  lost  by  him  on  wagers  made  with  the  defendants. 
The  defendants  were  the  incorporators  of  the  City  Produce 
Exchange.  It  appeared  that  they  had  combined  and  con- 
federated together,  styling  themselves  and  chartered  as 
the  City  Produce  Exchange  for  the  purpose  of  buying  and 
selling  "  futures  "  in  cotton  and  grain,  ostensibly,  while 
in  reality  this  was  a  pretence,  the  real  business  intended 
to  be  done,  and  in  fact  done,  being  the  pretended  purchase 
or  sale  of  such  products,  for  future  delivery,  under  con- 
tracts legal  and  valid  in  form,  but  in  fact  illegal  and 
invalid  because  of  the  non-existence  of  any  real  intention 
to  buy  or  sell  for  such  delivery,  and  so  framed  and 
executed  as  to  conceal  the  real  purpose  of  the  parties, 
which  was  to  gamble  on  the  rise  and  fall  of  the  products 
pretended  to  be  bought  or  sold.  It  was  contended  by  way 
of  defence  to  the  action  that  the  corporation  was  alone 
liable ;  that,  being  chartered  for  a  legal  purpose,  the  incor- 
porators could  not  be  held  liable  for  the  illegal  acts  of  the 
managers  or  officers  of  the  corporation.  But  the  court 
said:  "There  is  nothing  in  this  defence.  The  facts 
justify  the  finding  that  the  corporation  was  but  a  cloak 
used  to  cover  the  illegal  acts  contemplated  in  the  organ- 
ization and  done  as  a  business ;  and  in  such  case  the  form 

first  case  that  Mr.  Morawetz  has  in  mind  when  he  says  :  "  The  mere 
motive  and  intention  of  the  parties  forming  a  corporation  cannot  be 
inquired  into.  If  the  purpose  of  a  corporation,  as  indicated  by  its 
articles  of  association,  is  legal,  and  the  incorporation  is  effected  in  the 
manner  prescribed  by  law,  the  intention  of  the  incorporators  is  imma- 
terial. Even  if  the  corporation  should  afterwards,  in  pursuance  of  the 
pre-existing  intention  of  those  forming  it,  depart  from  its  authorized 
purposes,  that  would  merely  be  a  ground  for  dissolving  it  at  the  suit 
of  the  State,  as  in  other  cases  where  a  corporation  violates  the  law." 
Morawetz  on  Corporations,  sect.  758. 
1  85  Tenn.  572. 


EIGHTS  AND   LIABILITIES   UNDER   CONTRACTS.  269 

of  the  transaction  is  disregarded,  and  the  intent  and  sub- 
stance ascertained,  and  liability  fixed  for  the  thing  done, 
•without  respect  to  the  pretence  under  which  it  was 
attempted  to  be  concealed."  On  the  same  principle  it 
was  held  in  Smith  v.  Standard  Laundry  Machine  Co.1 
that  the  president  of  a  corporation  who  owned  all  the 
stock  was  personally  liable  in  damages  for  the  infringe- 
ment of  a  patent.  "  The  pretext  of  doing  business  in  the 
name  of  the  corporation,"  the  court  observed,  "is  too 
flimsy  to  shield  him  from  accounting  to  the  owner  of  the 
patent. " 

§  260.  Rule  -when  corporation  formed  in  good  faith  for 
lawful  purpose.  —  But  a  corporation  may  commit  fraudu- 
lent or  ultra  vires  acts,  and  ordinarily  the  corporators  and 
shareholders  are  not  liable  therefor.  ]t  may  become 
insolvent,  and  its  creditors  cannot  in  such  case,  in  the 
absence  of  statutory  liability,  look  to  the  corporators  or 
shareholders  to  make  up  the  deficiency  in  the  corporate 
assets.2  The  rule  stated  in  the  preceding  section  is  not 
applicable  when  the  corporation  is  really  formed  to  do 
that  which  as  a  corporation  it  lawfully  may  do,  and  is  not 
employed  as  a  mere  cloak  to  cover  designed  fraud.3 

§  261.  Estoppel  to  deny  corporate  existence.  —  Estoppel 
of  the  alleged  corporation.  —  Promoters  who  have  failed  to 
form  a  corporation  either  in  law  or  in  fact  may  yet,  in 
the  belief  or  without  the  belief  that  they  have  formed  a 
valid  corporation,  claim  to  have  corporate  existence,  and 
contract  and  carry  on  business  professedly  as  an  existing 
corporation.  It  is  well  settled  in  this  case  that,  if  the 

1  19  Fed.  Rep.  826. 

2  Cook's  Stock  and  Stockholders,  and  Corporation  Loan,  sect.  663  b. 
8  Atchison,  Topeka,  §•  Santa  Fe  Ry.  Co.  v.  Dains,  34  Kan.  209.     See 

Kankakee  fy  Seneca  R.  R.  Co.  v.  Horan,  131  111.  288,  the  decision  in  which 
ignores  the  doctrine  stated  in  the  text.  See  also  article  "  Liability  of 
an  Organizer  of  a  Corporation,"  27  American  Law  Review,  361. 


270         PROMOTERS  AND  PROMOTION   OF  CORPORATIONS. 

association  gotten  up  by  them  holds  itself  out  as  a  corpo- 
ration in  business  transactions  with  other  persons,  it  will 
be  estopped  against  such  persons  as  to  such  transactions 
to  deny  that  it  is  a  corporation  for  the  purpose  of  defeat- 
ing their  rights.1 

§  262.  Estoppel  of  stockholders  and  promoters.  —  The 
estoppel  extends  to  the  members  or  stockholders  of  the 
association,  as  against  persons  with  whom  the  associa- 
tion has  dealt  as  a  corporation.  Thus,  when  an  organiza- 
tion assumes  to  act  as  a  corporation,  and  issues  and  puts 
in  circulation  bonds  secured  by  a  mortgage,  stockholders 
in  the  organization,  as  such,  cannot  defeat  the  bonds  and 
mortgage  by  alleging  that  the  organization  was  not  duly 
incorporated.2  And  stockholders  in  a  professed  corpora- 
tion when  called  upon,  as  such,  to  respond  to  a  liability, 
are  not  permitted  to  deny  the  existence  or  the  legal  valid- 
ity of  the  corporation.3  Promoters-  are  likewise  estopped 
to  question  the  existence  of  the  corporation  when  suit  is 
brought  against  them  in  its  behalf  to  enforce  rights  grow- 
ing out  of  their  acts  as  promoters.  For  example,  if  they 
have  improperly  obtained  secret  profits  at  the  expense  of  the 
corporation  they  are  estopped  in  a  suit  brought  by  it  to  re- 
cover such  profits  to  deny  the  legality  of  the  organization.1 

1  Callender  v.  Plainsmlle  Sf  Hudson  R.  R.   Co.,  11  Ohio  St.  516; 
Stewart  Paper  Mfg.   Co.  v.  Rau,  92  Ga.  511 ;    Ten  Eyck  v.  Pontiac, 
Oxford,  if  Port  Austin  R.  R.  Co.,  74  Mich.  226 ;  Dooley  v.   Cheshire 
Glass  Co.,  15  Gray,  494.     Contra,  Boyce  v.  Trustees  of  Towsonton  Sta- 
tion of  M.  E.  Church,  46  Md.  359.     If  the  defendant  has  contracted 
as  an  association  or  organization  under  the  name  by  which  it  is  sued, 
it  is  immaterial,  so  far  as  the  plaintiff's  right  of  recovery  is  concerned, 
whether  it  is  a  corporation  de  jure,  a  corporation  de  facto,  or  a  mere 
voluntary  association.     Perine  v.  Grand  Lodge,  48  Minn.  82. 

2  Phinizyv.  Augusta  tf  K.  R.  Co.,  62  Fed.  Rep.  678.     See  also 
Beal  v.  Bass,  86  Me.  325. 

8  Casey  v.  Galli,  94  U.  S.  673. 

4  Pittsburg  Mining  Co.  v.  Spooner,  74  Wise.  307. 


EIGHTS  AND   LIABILITIES   UNDER   CONTRACTS.  271 

§  263.  Estoppel  of  persons  dealing  with  association  as  a 
corporation.  —  Persons  who  contract  with  an  association  as 
a  corporation  are  estopped  when  it  seeks  to  enforce  the 
contract  to  deny  that  it  is  a  corporation.  "  Parties  must 
take  the  consequences  of  the  position  the}7  assume.  They 
are  estopped  to  deny  the  reality  of  the  state  of  things 
which  they  have  made  appear  to  exist,  and  upon  which 
others  have  been  led  to  rely.  Sound  ethics  require  that 
the  apparent,  in  its  effects  and  consequences,  should  be 
as  if  it  were  real,  and  the  law  properly  so  regards  it. "  1 
Thus  the  execution  of  a  note  to  the  payee  as  a  corporation 
will  estop  the  maker  to  deny  that  the  payee  is  a  corpora- 
tion, in  a  suit  brought  upon  the  note.2  And  so  one  who 
makes  a  conveyance  to  persons  assuming  to  be  a  corpora- 
tion, and  describes  them  in  the  deed  as  a  corporation, 
will  be  debarred  thereby  from  disputing  their  corporate 
existence,  for  the  purpose  of  defeating  the  deed.3  A 
person  who  has  recognized,  dealt  with,  and  become  a  stock- 
holder in  a  de  facto  corporation,  is  estopped  in  an  action 
on  his  subscription  to  assert  that  it  never  was  legally 
organized.4  But  a  subscriber  for  stock  in  a  future  cor- 
poration, as  distinguished  from  one  held  out  to  be  in 
existence,  is  not  from  that  fact  alone  estopped,  in  a  suit 
brought  to  enforce  the  contract  of  subscription,  to  set  up 
as  a  defence  that  the  corporation  has  not  come  into  being. 

1  Swayne,  J.,  in  Casey  v.  Galli,  94  U.  S.  673;  Close  v.   Glenwood 
Cemetery,  107  U.  S.  467  ;   Commercial  Bank  of  Keokuk  v.  Pfeiffer,  108 
N.  Y.  242;  Ragan  v.  McElroy,  98  Mo.  349 ;  Searcy  v.  Yarnell,  47  Ark. 
269 ;  Stofflett  v.  Strome,  101  Mich.  197  ;   Wingett  v.  Quincy  Building 
Association,  128  111.  67;  Bank  of  Shasta  v.  Boyd,  99  Cal.  604  ;  Butchers 
fy  Drovers'  Bank  v.   McDonald,  130   Mass.    264  ;  Spahr  v.  Farmers' 
Bank,  94  Penn.  429;  Tuckaseegee  Mining  Co.  v.  Goodhue,  118  N.  C. 
981. 

2  Brickley  v.  Edwards,  131  Ind.  3. 

8  Whitney  v.  Robinson,  53  Wise.  309. 

*  Hausev.  Hannenheimer  (Minn.,  1896),  69  N.  W.  Rep.  810. 


272        PROMOTERS   AND   PROMOTION   OF  CORPORATIONS. 

Such  a  contract  does  not  recognize  the  corporate  existence, 
and  it  is  an  implied  condition  that  the  corporation  shall 
be  created  de  jure.1 

§  264.  Estoppel  to  deny  corporate  existence  of  associa- 
tion in  order  to  hold  members  individually  liable  on  its 
contracts.  — •  It  follows  from  the  rule  stated  in  the  preced- 
ing section  that  persons  who  contract  with  an  association 
as  a  corporation  are  estopped,  at  least  in  those  jurisdic- 
tions where  the  rule  of  estoppel  is  not  limited  to  de  facto 
corporations,  from  setting  up  that  the  association  is  not  a 
corporation  for  the  purpose  of  holding  the  members  indi- 
vidually liable  on  the  contract.2  To  support  the  estoppel 

1  Rickhoffv.  Brown's  Sewing  Machine  Co.,  68  Ind.  388 ;    Columbia 
Electric  Co.  v.  Dixon,  46  Minn.  463 ;  Schloss  v.   Trade   Co.,  87  Ala. 
411.     There  are  direct  decisions  to  the  effect  that  the  rule  of  estoppel 
stated  in  the  text  is  applicable  only  when  the  association  contracted 
with  as  a  corporation  is  at  least  a  de  facto  corporation.    Jones  v.  Aspen 
Hardware  Co.,  21  Col.  263;  Bradenstein  v.  Hoke,  101  Cal.  131 ;  Empire 
Mills  v.  Alston  Grocery  Co.  (Tex.  App.),  15  S.  W.  Rep.  505;   Snyder 
v.  Studebaker,  19  Ind.  462;  and  there  are  dicta  and  apparent  holdings 
to  the  same  effect  in  quite  a  number  of  cases.     But  ordinarily  there 
would  seem  to  be  no  sound  reason  for  such  a  distinction.      For  a  dis- 
cussion of  the  question,  see  Clark  on  Corporations,  p.   105  et  seq., 
where  the  cases  are  collected.     Perhaps  the  rule  should  not  be  applied 
in  the  case  of  a  subscription  for  stock  in  what  is  held  out  and  supposed 
to  be  an  existing  corporation,  but  in  reality  is  not  even  a  corporation 
de  facto.     If  it  is  applied,  the  subscriber  may  be  compelled  to  take 
what  he  has  not  bargained  for  —  shares  in  a  mere  voluntary  associa- 
tion, and  this  would  seem  to  be  unjust,  except  in  those  cases  where  he 
is  estopped  by  reason  of  his  participating  in  the  organization  or  busi- 
ness of  the  association  as  a  promoter  or  stockholder. 

2  Snider's  Sons'  Co.  v.  Troy,  91  Ala.  224  ;  Stout  v.  Zulick,  48  IST.  J. 
L.  599;   Planters  Sf  Miners'  Bank  v.  Padgett,  69  Ga.  159;  Merchants 
if  Manufacturers'  Bank  v.  Stone,  38  Mich.  779;  Johnston  v.   Gumbel 
(Miss.,  1896),  19  So.  Rep.  100 ;  Nebraska  Nat.  Bank  of  York  v.  Fer- 
guson (Neb.,  1896),  68  N.  W.  Rep.  370.     The  cases  on  the  individual 
liability   of  members  of   a  pretended  corporation   fall   into   several 
classes  :  — 

(1)  Those  which,  without  taking  into  account  the  doctrine  of  es- 


RIGHTS   AND   LIABILITIES   UNDER   CONTRACTS.  273 

in  such  case,  however,  it  must  appear  that  in  the  making 
of  the  contract  the  corporate  existence  has  been  recognized, 
and  that  the  contract  was  made  with  the  association  as 
a  corporate  body.  One  who  contracts  with  an  associa- 
tion, in  ignorance  of  its  claim  to  be  a  corporation,  is  not 
estopped  to  contend  that  the  members  are  individually 
liable  to  him.  The  mere  fact  that  the  contract  is  in  the 
name  of  a  company,  and  is  signed  by  officers  of  the  com- 
pany as  such,  does  not  create  a  presumption  that  the  com- 
pany is  a  corporation ;  it  is  equally  consistent  with  the 
theory  that  the  company  is  a  voluntary  association,  or  a 
partnership,  or  composed  of  a  single  individual.  Unin- 
corporated associations,  partnerships,  and  individuals  a» 
frequently  use  company  names,  perhaps,  as  do  corpora- 
tions, and  often  adopt  the  forms  and  methods  of  business 
corporations,  conducting  their  business  by  a  president  or 
treasurer. 1 

§  265.  Rights  and  liabilities  under  contracts  by  or  with 
association  acting  as  a  corporation,  when  there  is  no  estop- 
pel and  no  corporate  existence  even  de  facto.  —  Under  these 

conditions  the  rights  of  the  association  will  be  protected 

toppel,  hold  the  members  exempt  on  the  ground  that  the  association 
is  a  de  facto  corporation;  e.  g.  American  Salt  Co.  v.  Heidenheimer,  80 
Tex.  344. 

(2)  Those  which  hold,  apart  from  any  question  of  estoppel,  that 
the  association  is  not  a  partnership;  e.  g.  Fay  v.  Noble,  7  Gush.  188. 

(3)  Those  which  expressly  hold  that,  the  association  not  being  even 
ade  facto  corporation,  the  rule  of  estoppel  does  not  apply.     Empire 
Mills  v.  Alston  Grocery  Co.  (Tex.  App.),  15  S.  W.  Rep.  505.     The  re- 
maining cases  are  perhaps  inferentially  within  this  class.     See,  for 
example,  Montgomery  v.  Forbes,  148  Mass.  249. 

1  Duke  v.  Taylor,  37  Fla.  64;  Guckert  v.  Haeke,  159  Penn.  303; 
New  York  Nat.  Exchange  Bank  v.  Crowell  (Penn.,  1896),  35  At.  Rep. 
613;  Clark  v.  Jones,  87  Ala.  474;  Eaton  v.  Walker,  76  Mich.  579; 
Hunaerford  Nat.  Bank  v.  Van  Nostrand,  106  Mass.  559  ;  Clark  on  Cor- 
porations, p.  102. 

18 


274        PROMOTERS  AND   PROMOTION   OF   CORPORATIONS. 

by  the  courts.  Thus,  in  Insurance  Company  v.  Harbor 
Protection  Co.,1  certain  corporations  had  attempted  with- 
out right  to  form  a  corporation  under  the  general  laws, 
and  the  supposed  new  corporation  had  acquired  property. 
It  was  held  that  this  property  belonged  to  the  holders  of 
certificates  of  stock,  and  that  the  court  would  order  it 
sold  and  the  proceeds  divided  among  them.  As  to  the 
liability  of  the  members,  the  rule  is  maintained  in  quite 
a  number  of  jurisdictions  that  the  association  is  a  partner- 
ship, the  members  being  liable  to  creditors  accordingly, 
although  they  have  not  agreed  to  become  partners  or  held 
themselves  out  as  a  partnership.2  But  it  seems  clear  that, 
in  the  absence  of  such  an  agreement  or  holding  out,  this 
rule  cannot  be  justified  by  any  principle  of  the  law  of 
partnership.3  In  some  of  the  cases  in  which  it  has  been 
announced  and  applied,  it  has  apparently  been  made  to 
rest  on  the  ground  of  public  policy.  In  other  words,  it  has 
been  established  by  judicial  legislation.4  In  other  cases 
it  appears  to  have  resulted  from  the  theory  that  every  asso- 
ciation or  organization  must  be  either  a  partnership  or  a 
corporation ;  but  this  is  not  true ;  a  voluntary  association 
may  or  not  be  a  partnership,  and  its  members  may  or  may 
not  be  liable  as  partners  to  creditors.  This  must  depend 
upon  what  they  have  agreed,  or  held  themselves  out  to  be. 

1  37  La.  Ann.  233. 

2  Bigelow  v.  Gregory,  73  111.  197;  Loverin  v.  McLaughlin,  161  111. 
417,  435;  Abbott  v.  Omaha  Smelting  Co.,  4  Neb.  416;  Guckert  v.  Hacke, 
159  Penn.  303;  New  York  Nat.  Exchange  Bank  v.   Crowell  (Penn., 
1896),  35  At.  Rep.  613  ;   Garnett  v.  Richardson,  35  Ark.  144;  Ferris  v. 
Thaw,  72  Mo.  446 ;  Coleman  v.  Coleman,  78  Ind.  344 ;  Empire  Mills  v. 
Alston  Grocery  Co.  (Tex.  App.),  15  S.  W.  Rep.  505;  Smith  v.  Warden, 
86  Mo.  382;  Dukev.  Taylor,  37  Fla.  64;  Eaton  v.   Walker,  76  Mich. 
579  ;  Shields  v.  Clifton  Land  §•  Improvement  Co.,  94  Tenn.  123. 

8  Bates's  Law  of  Partnership,  sect.  4. 

4  But  in  Iowa  the  statute  expressly  imposes  the  liability.     Clegg  v. 
Hamilton  Sf  Wright  Grange  Co.,  61  la.  121. 


EIGHTS  AND  LIABILITIES   UNDER  CONTRACTS.  275 

Moreover  the  rule  is  unjust  to  innocent  stockholders,  and 
tends  to  produce  great  inconveniences  and  hardships, 
imposing,  as  it  does,  on  purchasers  of  stock  in  the  mar- 
ket the  burden  of  causing  an  investigation  to  be  made  to 
determine  whether  or  not  the  corporation  has  been  legally 
formed.  Ordinarily  this  is  not  practicable. 

If  the  members  of  a  supposed  or  alleged  corporation 
have  not  agreed  to  form  a  partnership  or  held  themselves 
out  as  partners,  and  the  statute  does  not  in  terms  impose 
upon  them  partnership  liability,  the  true  view  is  that 
their  liability  is  to  be  tested  by  the  principles  of  the  law 
of  agency.1  When  the  members  of  an  association  sought 
to  be  charged  on  a  contract  made  with  it  as  a  corporation 
supposed  the  association  to  be  a  corporation,  and  did  not 
enter  into  the  contract  personally,  and  there  is  no  statu- 
tory liability,  no  valid  reason  exists  why  they  should  be 
individually  held  on  the  contract,  unless  the  officers  or 
managers  who  made  it  were  their  agents  with  authority  to 
make  it  in  their  behalf.  And  there  is  no  justification  for 
inferring  such  agency  and  authority  from  the  mere  fact  of 
their  membership.  That  fact  does  not  tend  to  show  an 
agency  for  them  as  individuals.  On  the  contrary,  it 
establishes  only  an  attempted  agency  for  the  supposed 
corporation.  And  so  far  as  a  holding  out  of  an  agency  in 
such  case  goes,  it  is  not  a  holding  out  of  an  agency  for 
the  members  individually,  but  of  an  agency  for  a  corpora- 
tion. The  result,  it  is  true,  is  that  the  officers  or 
managers  making  the  contract  have  no  principal  behind 
them,  the  corporation  being  non-existent;  but  this  is 

1  Fay  v.  Noble,  1  Gush.  188;  Stafford  National  Bank  v.  Palmer,  47 
Conn.  443;  First  National  Bank  v.  Almy,  117  Mass.  476;  Ward  v. 
Brigham,  127  Mass.  24;  Seacard  v.  Pendleton,  55  Hun,  579;  Hum- 
phreys v.  Mooney,  5  Col.  282 ;  Medill  v.  Collier,  16  Ohio  St.  599 ;  Blan- 
chard  v.  Kaull,  44  Cal.  440. 


276    PEOMOTEKS  AND  PROMOTION  OF  CORPORATIONS. 

not  anomalous.  Not  infrequently  a  contract  fails  because 
one  of  the  parties  in  whose  behalf  it  purports  to  have  been 
made,  and  whom  it  was  intended  to  charge,  turns  out  to 
be  non-existent,  or  because  such  party  did  not  authorize 
the  contract  to  be  made  for  him.  The  remedy  here  is 
plain,  those  who  actually  made  the  contract  as  that  of  an 
existing  corporation  being  liable  in  damages  to  the  other 
party  to  the  contract,  if  they  have  misled  him  to  his  in- 
jury by  their  action.1 

The  agency  of  promoters,  officers,  or  managers  of  an 
alleged  corporation  for  the  members  thereof,  as  individu- 
als, may ,  however,  be  expressly  created  by  or  implied  from 
the  acts  of  such  members.  For  reasons  already  stated, 
the  inference  is  not  to  be  drawn  from  the  mere  fact  that 
the  members  chose  or  appointed  the  officers  or  managers 
who  made  the  contract,  and  authorized  them  to  act  for 
the  supposed  corporation,  nor  from  the  mere  fact  that 
the  members  have  received  dividends  as  stockholders. 
But  if  they  knew  at  the  outset  or  subsequently  became 
aware  that  the  association  was  not  a  corporation,  and 
then,  by  continuing  as  members  or  otherwise,  acquiesced 
in  the  carrying  on  of  the  business  by  the  officers  or 
managers,  they  may  be  held  as  principals.2 

1  See  sect.  230. 

2  Seacard  v.  Pendleton,  55  Hun,  579 ;  Fuller  v.  Rowe,  57  N.  Y.  23  ; 
Central  City  Savings  Bank  v.  Walker,  66  N.  Y.  583 ;  Medill  v.  Collier, 
16  Ohio  St.  599 ;  Johnson  v.  Corsner,  34  Minn.  355. 


INDEX. 


INDEX. 


References  are  to  Sections. 


ABORTIVE  CORPORATION, 

promoter's  liability  to  subscribers  for  shares  for  money  advanced, 

162. 

expenses  not  to  be  deducted  unless  authorized,  163. 
payment  to  promoter  or  his  agent  must  be  shown,  164-166. 
lien,  none  in  favor  of  subscriber  for  shares  as  against  creditors, 

167. 

remedy  at  law  unless  fraud  or  necessity  for  accounting  shown,  168. 
bill  for  an  accounting,  169. 
ACCEPTANCE, 

by  corporation  of  promoter's  contracts.     (See  CONTRACTS  of 

Promoters.) 

ACCOUNTABILITY, 

of  promoters  generally,  23. 
of  promoters  to  corporation, 

for  benefit  of  purchase,  42-57. 

none  from  mere  fact  that  purchase  made  by  promoter  while 

such,  44. 
none  when  made  before  promoter  became  such,  46-48. 

unless  certain  declarations  are  made,  51-53. 
for  benefit  of  option,  54—56. 

for  benefit  of  option  held  by  one  confederating  with  pro- 
moter, 58,  59. 

effect  of  certain  declarations,  55-57. 

for  benefit  when  corporation  makes  payment  in  its  stock,  83. 
remedy  1,  by  recovery  of    stock  and  dividends    paid 

thereon,  83. 
remedy  2,  by  recovery  of  highest  intermediate  value  of 

stock,  83. 
remedy  3,  by  recovery  of  amount  received  by  promoter 

for  stock,  if  sold,  with  dividends,  83. 
distinction  between  benefit  and  profit,  60. 
for  profit  on  sale  to  corporation  of  property  bought  by  pro- 
moter before  he  became  such,  60-82. 
when  property  has  a  market  price,  61. 
none  when  purchase  by  corporation  has  been  properly 

approved,  61. 

where  property  has  no  market  price,  62. 
net  profit  only  to  be  accounted  for,  79. 


280  INDEX. 

References  are  to  Sections. 

ACCOUNTABILITY  —  continued, 

for  promotion  money,  64-74. 

net  proceeds  only  to  be  accounted  for,  79. 

but  no  allowance  for  expenses  ultra  vires  the  corporation,  80. 

for  commissions  received  from  vendor  to  corporation,  64-75, 
77,  78,  83. 

for  interest,  82. 

action  survives  against  promoter's  administrator  or  executor, 
89. 

burden  of  proof,  104. 

statute  of  limitations,  84-87. 

estoppel  of  corporation,  88. 
of  promoter  to  shareholders  and  subscribers  for  shares,  123-125. 

joinder  of  plaintiff,  126. 

for  misrepresentations.     (See  SUBSCRIBERS  FOR  SHARES.) 

for  money  advanced,  when  project  fails.     (See  ABORTIVE 

CORPORATION.) 
of  persons  confederating  with  promoters,  76. 

for  benefit  of  option,  58,  59. 

of  vendor  to  corporation  having  secret  agreement  with  promoter,  75. 
distinguished  from  liability  for  damages,  46. 

ACTION, 

by  corporation  against  promoter, 

for  an  accounting,  may  be  barred  by  statute  of  limitations, 

84-87. 

may  be  divested,  how,  88. 

for  damages,  will  not  ordinarily  lie  for  misfeasance,  90. 
will  lie  for  fraud,  76,  90,  92. 

for  injurious  violation  of  duty  to  corporation,  91. 
if  misfeasance  causes  pecuniary  loss,  91,  92. 
form  of  action,  deceit,  92. 

when  for  accounting,  survives  against  executor  or  adminis- 
trator of  promoter,  89. 
for  rescission.     (See  RESCISSION.) 

suit  by  minority  shareholders.    (See  SHAREHOLDERS'  BILL.) 
by  subscriber  for  shares  against  promoter, 

for  damages  for  concealment  or  misrepresentation  or  for  ac- 
counting, when  fiduciary  relation  exists,  123-129. 
for   damages  for  concealment    or   misrepresentation,   when 
fiduciary  relation  does  not  exist.     (See  SUBSCRIBERS  FOR 
SHARES.) 
by  subscriber  for  shares  against  corporation, 

ordinarily  none  for  frauds  of  promoter  before  organization,  171. 

action  of  deceit,  170-172. 

effect  of  insolvency  of  corporation  upon,  172. 

action  for  money  had  and  received,  174. 

rescission  of  contract  of  subscription.    (See  RESCISSION.) 


INDEX.  281 

References  are  to  Sections. 

ADMISSION, 

by  promoter  of  liability  on  contract  made  by  him  before  he  be- 
came such,  effect  of,  239. 
ADOPTION, 

by  corporation   of  promoter's  contracts.      (See  CONTRACTS  of 

Promoters.) 
AGENT, 

not  necessarily  a  promoter,  2-4. 

may  be  promoter  although  compensation  does  not  come  from  cor- 
poration, 5. 

of  vendor  to  corporation,  when  liable  as  promoter,  4. 
of  stranger  becomes  a  promoter,  when,  5,  6. 
promoters  not  prima  facie  each  other's  agents,  233. 
AGREEMENT  TO   PROMOTE, 

does  not  alone  make  one  a  promoter,  16. 
AGREEMENTS, 

of  promoters  must  be  disclosed  in  prospectus,  in  England,  154. 
different  rule  in  United  States,  153. 
(See  also  CONTRACTS.) 
ASSOCIATION  ACTING  AS    A   CORPORATION,   BUT  NOT 

SUCH   EVEN  DE   FACTO, 
estoppel  to  deny  legal  incorporation,  261-264. 
members  held  as  partners  in  some  jurisdictions ;  rule  criticised, 

265. 

question  of  agency,  one  member  for  another,  question  of  fact,  265. 
ordinarily  no  agency  for  members  individually,  265. 
may  be  imposed  upon  members  by  statute,  265. 
agency  may  arise  from  knowledge  by  members  of  illegality  of  in- 
corporation, 265. 


BENEFIT,  (See  ACCOUNTABILITY.) 

of  option  held  by  promoter,  when  corporation  may  have,  54,  56,  57. 
corporation  may  have,  if  promoter  offers  corporation  advan- 
tage of  option,  55. 
of  option  held  by  third  person  confederating  with  promoter,  when 

corporation  may  have,  58,  59. 

of  secret  promotion  money,  corporation  entitled  to,  64-74. 
of  purchase  made  by  promoter  acting  as  such  ;  corporation's  right 
to  claim,  42,  43. 

no  right  from  mere  fact  that  purchase  made  by  promoter 

while  such,  44. 
no  right  in  corporation  to  benefit  of  purchase  or  option  in  case 

of  certain  disclosures  by  promoter,  42. 

of  purchase  made  by  promoter  before  he  became  such,  corporation 
may  not  have,  46-48. 

unless  promoter  has  made  certain  declarations,  51-53. 


282  INDEX. 

References  are  to  Sections. 

BURDEN  OF  PROOF, 

in  actions  to  rescind,  104,  190. 

to  recover  secret  profits,  104. 
upon  corporation  to  show  waiver  or  laches,  when,  190. 

CAVEAT  E  MPT  OR, 

applicable  in  dealings  between  promoter  and  subscriber  for  shares, 

130,  n.  1,  182. 
not  applicable  to  dealings  between  promoter  and  corporation,  98. 

CERTIFICATE  OF   INCORPORATION, 

how  far  conclusive,  251. 

COLORABLE  TRANSFER  OF  PROPERTY  TO  PROMOTER, 

court  will  go  behind  in  determining  measure  of  accountability, 
49,  50. 

COMMENDATORY  EXPRESSIONS, 

by  promoters  to  subscribers  for  shares  privileged,  not  actionable, 
133. 

COMMISSIONS, 

when  secretly  paid  promoter  by  vendor  to  corporation,  to  be  ac- 
counted for,  4,  63-74. 

when  secretly  secured  by  promoter,  not  at  expense  of  corporation, 
to  be  accounted  for,  77,  78. 

analogy  of  trustee,  78. 

accountability  of  persons  confederating  with  promoters,  76. 

rule  as  to  recovery  when  commission  in  form  of  shares  of  corpora- 
tion's stock,  83. 

interest,  82. 

statute  of  limitations,  84-87. 

estoppel  of  corporation,  88. 

COMPANIES   ACTS, 

English  decisions  in  some  cases  based  upon,  80. 
corporation  allowed  to  pay  promoter  reasonable  expenses,  81. 
requirements  of,  as  to  disclosure  of  promoter's  contracts  in  pro- 
spectus, 154. 

CONCEALMENT,     (See  NON-DISCLOSURE  BY  PROMOTERS.) 
of  material  facts  implies  fraudulent  misrepresentation,  147. 
when  fiduciary  relation  exists,  ground  for  damages  in  suit  by 
shareholders  against  promoters,  127-129. 

CONFEDERATES  OF  PROMOTERS, 

liable  to  account  or  in  damages  to  corporation,  58,  59,  76. 

CONSPIRACY, 

what  misrepresentations  of  promoters  will  support  indictment  for, 
156. 


INDEX.  283 

References  are  to  Sections. 

CONTRACTS. 

between  promoters, 

none  implied  for  payment  by  co-promoters  for  services,  245. 
none  implied  as  to  going  forward  with  undertaking,  246. 
as  to  formation  and  management  of  corporation,  247. 
restricting  sale  of  their  stock,  legal  and  not  against  public 

policy,  248. 
between  promoter  and  corporation, 

in  making  corporation  must  ordinarily  act  through  disinter- 
ested board  of  directors,  26. 

promoter's  duty  to  see  that  corporation  does  so  act,  24. 
rule  otherwise  when  full  disclosure  made  and  shareholders 

consent,  27. 
when  promoter  has  received  secret  benefits,  corporation  may 

have  accounting,  94. 
under  some  circumstances  corporation  may  ratify  contract, 

100. 
under  some  circumstances  corporation  may  rescind  contract, 

94-96,  100. 
caveat  emptor  not  applicable  to  dealings  by  promoters  with 

corporation,  98. 
corporation  may  not  rescind  when  promoter  has  disclosed  his 

position  and  interest,  94-96. 

in  case  of  rescission,  consideration  to  be  returned,  102. 
except  in  cases,  its  equivalent,  102. 
when  worthless,  need  not  be  returned,  102. 
laches,  effect  of,  on  right  to  rescind,  101. 
by  promoters  in  behalf  of  projected  corporation, 
corporation  not  ordinarily  bound  by,  194-198. 
corporation  cannot  ordinarily  enforce,  194-197. 
liability  of  corporation  in  equity  where  promoters  are  the  only 

shareholders,  194  n. 

corporation  not  liable  where  it  has  not  availed  itself  of  con- 
tract, 198. 

contract  cannot  be  ratified  by  corporation,  199. 
equitable  doctrine  of  Lord  Cottenham,  200. 
Lord  Cottenham's  doctrine  not  universally  accepted,  201. 
contract  may  be  accepted  or  adopted  by  corporation,  202. 
effect  of  such  adoption  or  acceptance,  203. 
distinguished  from  ratification,  203,  214. 
acceptance  or  adoption  may  be  express  or  implied,  204,  205. 
acceptance  or  adoption  may  be  inference  of  fact,  206-210. 
inference  may  be  from  taking  of  benefit  of  contract,  207- 

210. 

taking  of  benefit  of  contract  only  evidence  of  acceptance,  207. 
ordinarily  proof  when  contract  is  in  name  of  corporation, 

208. 
or  in  its  behalf,  209. 


284  INDEX. 

References  are  to  Sections. 

CONTRACTS  —  continued. 

rule  of  acceptance  or  adoption  applicable  to  subscription  for 
shares,  211. 

modification  in  some  jurisdictions,  211,  n.  1. 
"  ratification  "  distinguished  from  "  acceptance  "  and  "  adop- 
tion," 214. 
"  ratification  "  used  meaning  acceptance  or  adoption,  212, 213. 

distinction  sometimes  of  vital  importance,  214. 
English  doctrine,  new  contract  with  new  consideration,  215, 
216. 

new  contract  may  be  inferred  from  facts,  215,  216. 
but  not  from  mere  taking  benefits  of  prior  contract,  215. 
followed  apparently  in  Massachusetts,  215,  n.  1. 
ultra  vires  contracts  cannot  be  accepted  or  adopted,  217. 
test  to  determine  what  contract  can  be  accepted  or  adopted, 

217. 

promoter's  liability  on,  when  made  in  name  or  on  behalf  of  pro- 
jected corporation, 

ordinarily  none,  225,  230. 

unless  credit  given  on  promoter's  responsibility,  240. 

question  of  intention,  225-227. 

presumption  when  corporation  does  not  exist,  226. 

presumption  may  be  overcome,  226. 

if  contract  oral,  jury  to  interpret,  226,  227. 

if  contract  written,  court  to  interpret,  228,  229. 

construing  document   "  ut  magis   valeat   quam  pereat,"  228, 

229. 

construction  of  words  "  on  behalf  of  "  corporation,  228. 
•when  credit  given  to  corporation,  promoter  not  liable  on  con- 
tract, 230. 
but  may  be  liable  for  misrepresentation  as  to  existence 

of  corporation,  230. 
remedy  when  misrepresentations  are  innocent,  230. 

when  misrepresentations  are  fraudulent,  230. 
when  credit  given  promoter,  effect  of  adoption  by  corpora- 
tion, 231. 

promoter  still  liable,  231. 

creditor  to  elect  between  promoter  and  corporation,  231. 
corporation   to   indemnify   promoter   if   promoter   held 

liable,  231. 
when  made  by  co-promoters.     (See  LIABILITY  of  Promoters 

for  Acts  of  Co-promoters.) 
right  of  promoter  to  enforce,  when  made  in  name  or  on  behalf  of 

projected  corporation,  231,  232. 
rights  and  liabilities  under,  when  incorporation  defective,  249-265. 

(See  also  ASSOCIATION  and  DE  FACTO  CORPORATION.) 
right  of  corporation  to  rescind  contracts  for  fraud  or  breach  of 
duty  of  promoters.     (See  RESCISSION  by  Corporation.) 


INDEX.  285 

References  are  to  Sections. 

CO-PROMOTERS, 

right  to  contribution  when  held  liable,  242-244. 

right  to  payment  for  services,  none  unless  agreed,  245. 

misrepresentations  by  promoter,  liable  for,  when,  157. 

not  presumptively  partners ;  authority  must  be  shown,  233. 

liability  of  promoter  for  acts  of.    (See  LIABILITY  of  Promoters.) 

CORPORATION, 

when  contracting  with  promoter,  must  act  through  disinterested 
board  of  directors,  26. 

exceptions  to  rule,  27. 
interest  of,  duty  of  promoter  to  protect,  21. 
burden  upon,  to  show  laches  or  waiver  in  suits  on  subscription  for 

shares,  190. 
burden  of  proof  in  suits  for  rescission  or  to  recover  secret  profits, 

104. 

liability  of,  for  expenses  incident  to  formation.     (See  LIABILITY 
of  Corporation.) 
for  misrepresentations  of    promoters.      (See    SUBSCRIBERS 

FOR  SHARES.) 
usually  none  for  misrepresentations  or  non-disclosures  of 

promoters  before  formation,  173. 
rescission  of  subscription  for  shares,  when,  173. 
statements  in  prospectus  not  severable  from  application  for 

shares,  173. 

none  for  frauds  of  promoters  before  organization,  171. 
action  of  deceit  lies,  when,  170. 
insolvency  of  corporation,  effect  of  on  its  liability,  172. 

on  right  of  subscriber  for  shares  to  rescind  subscription, 

191,  192. 

right  to  an  accounting  for  benefit  of  purchase  by  promoter  upon 
sale  by  him  to  corporation,  42,  43. 

none  from  mere  fact  that  purchase  made  by  promoter  while 

such,  44. 

none  if  purchase  made  before  promoter  became  such,  46-48. 

unless  promoter  is  bound  by  certain  declarations,  51-53. 

benefit  of  promoter  from  option,  when  to  be  accounted  for, 

54-57. 
benefit  of  option  held  by  third  person  confederating  with 

promoter,  58,  59. 

for  secret  profit  of  promoter  on  sale  of  property  having  a 
market  value,  61. 

when  property  has  not  market  value,  62. 
for  promotion  money  in  hands  of  vendor,  75. 
for  net  profit  of  promoter  only,  79. 
but  promoter  not  allowed  for  expenses  ultra  vires  of  cor- 
poration, 80. 
for  promotion  money  in  hands  of  promoter,  64-74. 


286  INDEX. 

References  are  to  Sections. 

CORPORATION  —  continued. 

may  have  interest  on  money  recovered  from  promoter,  82. 
may  rescind  certain  contracts  for  breach  of  duty  or  fraud  by  pro- 
moters.    (See  RESCISSION.) 
right  of  rescission  may  be  barred  by  laches,  101 . 
may  ratify  certain  acts,  expressly  or  impliedly,  100. 
ratification  irrevocable  if    intelligently  made,   100.     (See  also 

CONTRACTS  of  Promoters.) 
actions  by,  against  promoters, 

foran  accounting,  may  be  barred  by  statute  of  limitations,  84, 85. 

for  an  accounting,  may  be  divested,  how,  88. 

for  an  accounting,  survives  against  promoter's  executor  or 

administrator,  89. 
will  lie  for  fraud,  76,  90,  92. 

none  ordinarily  for  damages  for  misfeasance,  90,  92. 
will  lie  for  misfeasance,  occasioning  pecuniary  loss  to  cor- 
poration, 91,  92. 

will  lie  for  injurious  violation  of  duty  to  corporation,  91. 
form  of  action,  deceit,  92. 
right  of  shareholders  to  sue  to  enforce  corporate  rights  or  redress 

corporate  wrongs.     (See  SHAREHOLDERS'  BILL.) 
de  facto  corporation,  nature  and  attributes  of,  252. 
what  necessary  to  constitute,  254-256. 
estoppel  of  corporation  to  deny  its  legal  organization,  261. 
right  and  liabilities  generally.     (See  ACCOUNTABILITY,  ACTION, 
CONTRACTS,  SUBSCRIBERS  FOR  SHARES.) 

DAMAGES,     (See  ACTION,  LIABILITY,  MISFEASANCE,  MISREPRE- 
SENTATION, SUBSCRIBERS  FOR  SHARES.) 

measure  of,  various  rules,  158. 
Massachusetts  rule,  159. 
New  Jersey  rule,  160. 

English  rule,  also  in  United  States  Supreme  Court,  161. 
DE  FACTO  CORPORATION, 

rights  and  liabilities  under  contracts  of,  generally,  249. 

nature  and  attributes,  252. 

distinguished  from  corporation  de  jure,  252. 

to  be  treated  as  corporation  except  by  State,  252. 

subscribers  for  shares  before  incorporation  may  question   legal 

existence  of,  252,  n.  3. 

promoters  and  shareholders  not  liable  for  its  debts,  253. 
what  constitutes,  254. 

a.    valid  enabling  statute  under  which  incorporation  possible, 

255. 
J.   attempt  to  incorporate,  and  imperfect  compliance  with 

law,  256. 
attempt  must  be  bonaf.de  to  avoid  personal  liability,  257. 


INDEX.  287 

References  are  to  Sections. 

DE  FACTO  CORPORATION—  continued. 

c.   user  of  corporate  privileges,  254. 

results  from  allowing  individuals  to  impeach  legality  of,  257. 
construction  of  incorporation  statute  by  domestic  court  followed 

in  foreign  jurisdictions,  258. 
DECEIT, 

action  of,  lies  against  corporation,  170. 
(See  ACTION,  CORPORATION,  SUBSCRIBERS  FOR  SHARES.) 
DECLARATIONS   OF   PROMOTERS, 

of  mere  fact  of  interest,  to  shareholders,  sufficient,  35. 

of  mere  fact  of  interest,  to  directors,  insufficient,  33,  34. 

as  to  property  purchased  before  becoming  promoter,  what  make 

him  accountable,  51-53. 
as  to  property  sold  corporation  on  which  promoter  had  option, 

what  make  him  accountable,  55-57. 
DEFECTIVE  INCORPORATION,     (See  INCORPORATION.) 

results  of,  upon  contracts  of  promoters,  249 
DIRECTOR, 

promise  to  become,  may  make  one  a  promoter,  13. 

promising  to  qualify  and  qualifying  of  directors  may  make  one  a 

promoter,  14. 

what  disclosure  by  promoter  to  directors  sufficient,  33,  34. 
DISABILITY   OF   CORPORATION, 

ground  for  shareholders'  bill,  106,  107. 
DISCLOSURE, 

duty  of  promoters  to  make,  to  corporation  when  selling  property 

to  it,  26. 

Lord  Cairns'  rule  as  to,  26. 

rule  when  promoters  are  the  sole  shareholders,  27. 
must  be  of  nature  and  amount  of  interest,  28. 
of  price  paid  by  promoters  not  necessary,  when,  29. 
of  fact  of  interest  alone,  to  directors,  ordinarily  insufficient,  33,  34. 
of  fact  of  interest  alone,  to  body  of  shareholders,  sufficient,  35. 
to  whom  disclosure  must  be  made  and  by  whom  acted  upon,  38. 
to  all  the  shareholders,  and  assent  by  them,  effect  of,  39. 
when  binding  on  future  shareholders,  39. 
when  stock  not  all  issued,  40. 
when  transaction  is  ultra  vires,  41. 
necessary  in  spite  of  certain  provisions  in  articles  of  association, 

36,  37. 
of  agreements  of  promoters  must  be  in  prospectus  in  England,  154. 

otherwise  in  United  States,  153. 
want  of,  as  ground  for  action  for  damages  by   subscribers   for 

shares  against  promoters,  127-129,  148-152. 
whether  legal  or  moral  duty  of  promoters  to  disclose  material 

facts  to  subscribers  for  shares,  178-183. 
want  of.     (See  also  NON-DISCLOSURE.) 


288  INDEX. 

References  are  to  Sections. 

DUTIES   OF   PROMOTERS, 

generally,  16. 

similar  to  those  of  trustee  or  agent,  21,  42. 

to  make  reasonable  use  of  their  powers,  21. 

to  exercise  good  faith  in  dealings  with  or  for  corporation,  23. 

to  provide  competent  and  disinterested  board  of  directors,  24,  27. 

to  see  that  directors  act  impartially,  25,  27. 

not  to  receive  commissions  or  gifts  from  vendors  to  corporation, 

63,  64. 

to  make  certain  disclosures,  26. 

to  disclose  their  interest  in  transactions  with  corporation,  28,  36. 
as  vendors  to  corporation,  when  necessary  to  disclose  price  paid 

by  them,  28-30. 
mere  declaration  of  interest,  without  stating  nature  and  amount, 

not  enough  when  made  to  directors  only,  33,  34. 
but  such  declaration  sufficient  if  made  to  the  shareholders,  35. 
to  disclose  material  facts  to  subscribers  for  shares,  whether  legal 

or  moral  duty,  178-183. 
remedy  for  breach  of   duty.     (See  ACCOUNTABILITY,   ACTION, 

CORPORATION,  MISFEASANCE,  SUBSCRIBERS  FOR  SHARES.) 

ESTOPPEL, 

of  association  and  promoters  to  deny  legal  incorporation,  261,  262. 
of  persons  dealing  with  association  as  corporation  to  deny  its  cor- 
porate existence  in  suits  by  it,  263. 
when  subscriber  for  shares  not  estopped  to  deny  existence  of 

corporation,  263. 
of  persons  dealing  with  association  as  corporation  to  allege  want 

of  corporate  existence  to  hold  members  individually,  264. 
recognition  of  corporate  existence  necessary  to  support  estoppel, 

264. 
EVIDENCE   OF  PROMOTERSHIP, 

generally,  1-18. 
EXPENSES  OF   INCORPORATION, 

liability  of  corporation  to  pay.    (See  LIABILITY  of  Corporation.) 

FIDUCIARY  RELATIONSHIP, 

between  promoter  and  corporation,  21,  22. 
consequences  of  such  relationship,  23. 

between  promoter  and  subscriber  for  shares,  123-126, 127-130. 
FORMATION   OF   CORPORATION.     (See  DE  FACTO  CORPORA- 
TION, DUTIES  OF  PROMOTERS,  LIABILITY.) 
FRAUD,     (See  LIABILITY.) 

by  promoters  ground  for  action  for  damages  by  corporation,  90,  92. 
for  rescission  of  contracts,  97. 

when  prior  to  organization,  not  ground  for  action  against 
corporation,  171. 


INDEX.  289 

References  are  to  Sections. 

FRAUD  —  continued. 

as  a  defence  in  action  by  corporation  against  subscriber  for 

shares,  174. 
as  ground  for  action  of  shareholders  against  promoters.    (See 

SUBSCRIBERS  FOR  SHARES.) 

by  majority  shareholders,  ground  for  shareholders'  bill  by  minor- 
ity shareholders,  108-112,  116,  118. 

GIFT.    (See  COMMISSION,  PROFIT.) 
GOOD   FAITH, 

promoters  must  exercise,  in  dealings  with  or  for  corporation,  23. 
GUARANTY  OF   STOCK   SUBSCRIPTION, 

does  not  necessarily  make  one  a  promoter,  15. 

HIGHEST  INTERMEDIATE   VALUE, 

rule  of,  in  suit  by  corporation  against  promoter  for  accounting,  83. 

INCORPORATION, 

consequences  of  defective  or  irregular  compliance  with  statutory 
requirements  for,  249-264. 

de  facto  incorporation,  252-257. 

de  jure  incorporation,  249. 

construction  of  statute  by  courts  of  State  where  enacted  followed 
by  courts  of  other  States,  258. 

certificate  of  incorporation,  how  far  conclusive,  251. 
INSOLVENCY   OF   CORPORATION, 

effect  on  right  of  defrauded  subscriber  for  shares  to  rescind  sub- 
scription or  recover  damages  from  corporation,  172,  190,  191. 

INTEREST, 

promoters  chargeable  with,  when  accountable  to  corporation  for 

profits  and  commissions,  82. 
corporation  chargeable  with,  on  rescission  of  subscription,  174. 

INTEREST   OF   PROMOTERS, 

in  certain  contracts  to  be  disclosed.     (See  DISCLOSURE,  DUTIES 

OF  PROMOTERS.) 
INVITATION   OF  PROMOTERS   TO  JOIN   ENTERPRISE, 

effect  of,  123-125. 

JOINT   LIABILITY   OF  PROMOTERS, 

if  combination  to  secure  secret  profits  jointly  liable,  76. 
effect  of  release  of  one,  241. 

LACHES, 

bar  to  corporation's  right  to  rescind  contract  with  promoter,  101. 
bar  to  suit  by  subscriber  for  shares  to  rescind  subscription,  188. 

burden  upon  corporation  to  show,  190. 
bar  to  shareholders'  bill,  121. 

19 


290  INDEX. 

References  are  to  Sections. 

LIABILITY, 

of  corporation  in  damages  to  subscribers  for  shares  for  misrepre- 
sentation of  promoters,  170,  171. 

effect  of  corporate  insolvency,  172,  191-193. 
of  corporation  to  promoters  and  agents, 

for  expenses  and  services  incident  to  formation,  79. 
statutory  liability,  to  those  looking  to  corporation  for  pay, 

218. 

under  English  Companies  Acts,  authority  to  pay,  merely,  219. 
no  legal  liability  imposed,  220. 
equitable  liability  on-  quantum  meruit  for  whose  benefit, 

221. 

American  doctrines  of  liability,  222. 
power  of  private  corporations   to   pay  formation   expenses 

wanting  statutory  or  charter  provisions,  222. 
ordinarily  none  for  services  and  expenses  in  procuring  sub- 
scribers for  shares,  223. 
doctrine  held  in  Vermont  and  New  Hampshire  criticised, 

224. 
of  promoter  to  corporation, 

for  an  accounting.     (See  ACCOUNTABILITY.) 
for  misfeasance,  ordinarily  none,  90. 

otherwise  when  occasions  pecuniary  loss  to  corporation, 

91,  92. 

or  injurious  violation  of  fiduciary  relation,  46,  91,  92. 
for  fraud,  90,  92. 

for  damages,  distinguished  from  accountability,  46. 
of  promoters  to  subscribers  for  shares  and  shareholders, 
for  an  accounting  to  individual  shareholders,  123-125. 

joinder  of  plaintiffs,  126. 

for  misrepresentations   generally.     (See  also   SUBSCRIBERS 
FOR  SHARES.) 

when  fiduciary  relation  exists,  127-129. 
for  misrepresentations  of  co-promoters,  157. 
in  action  of  deceit.     (See  SUBSCRIBERS  FOR  SHARES.) 
when  project  fails  of  completion,  162. 

expenses  not  to  be  deducted  unless  authorized,  163. 
payment  by  subscriber  to  promoter  or  promoter's  agent 

must  be  shown,  164-166. 
lien,  none  in  favor  of  subscribers  as  against  creditors, 

167. 
remedy  at  law,  unless  fraud  or  necessity  of  accounting 

shown,  169. 

bill  for  accounting,  169. 
of  promoter  to  purchasers  of  shares, 

none  ordinarily  for  misrepresentations  in  prospectus,  140. 
otherwise  if  connection  is  shown  between  promoter  and  pur- 
chaser of  shares,  141,  142. 


INDEX.  291 

References  are  to  Sections. 
LIABILITY  —  continued. 

of  promoter  to  third  parties, 

on  contracts  made  in  name  or  on  behalf  of  corporation. 

(See  CONTRACTS  of  Promoters.) 
on  contract  before  becoming  promoter,  239. 
upon  non-compliance  with  provisions  for  incorporation,  249. 
(See  also  ASSOCIATION  and  DE   FACTO  CORPORATION.) 

individually,  when  incorporation  really   for   unlawful  pur- 
pose, 259. 

for  misrepresentation  of  co-promoters,  157. 
for  acts  of  co-promoters, 
ordinarily  none,  233. 

unless  credit  is  placed  on  promoter's  responsibility,  240. 
authority,  question  of  fact  for  jury,  234. 
not  ordinarily  from  appearance  of  name  in  prospectus, 

235. 
nor  from  announcement  that  promoter  and  others  are 

organizing  a  corporation,  235. 
nor  from  signing  and  filing  articles  of  incorporation, 

235. 

but  may  be  from  conduct  in  carrying  on  business,  235. 
or  from  certain  statements  in  prospectus  coupled  with 

promoter's  name,  236. 
or  from  having  acted  in  the  undertaking,  question  for 

jury,  237,  238. 
or  from  acts  showing  knowledge  and  concurrence,  237, 

238. 

of  promoter  to  co-promoter  who  has  been  held  liable,  242. 
must  contribute  when  all  are  jointly  liable,  243,  244. 
none  to  pay  for  service,  wanting  agreement,  245. 
of  promoter  for  misrepresentations  generally,  23. 

(See  also  MISREPRESENTATION.) 
LIEN, 

none  in  favor  of  subscriber  for  shares  as  against  creditors  of 

abortive  corporation,  167. 
LIMITATION, 

of  action  against  promoter  for  profits,  84,  85. 

statute  runs  from  time  facts  become  known  to  corporation,  86,  87. 

MAJORITY  SHAREHOLDERS.     (See  SHAREHOLDERS'  BILL.) 
MEASURE  OF  ACCOUNTABILITY, 

in  actions  by  corporation  against  promoter  where  commission  is 
stock,  83. 

1,  transfer  of  shares  to  corporation,  83. 

2,  payment  to  corporation  of  highest  intermediate  value,  83. 

3,  payment  to  corporation  of  proceeds  from  sale  of  stock  by 

promoter,  83. 


292  INDEX. 

References  are  to  Sections. 

MEASURE   OF  ACCOUNTABILITY—  continued, 

of  damages  in  actions  by  subscribers  for  shares  against  promoters, 
various  rules,  158. 

Massachusetts  rule,  159. 
New  Jersey  rule,  160. 

English  rule ;  also  of  United  States  Supreme  Court,  161. 
MINORITY  SHAREHOLDERS.     (See  SHAREHOLDERS' BILL.) 
MISFEASANCE  OF  PROMOTERS, 

not  ordinarily  ground  for  action  by  corporation  for  damages,  90. 
otherwise  if  occasions  pecuniary  loss  to  corporation,  91,  92. 
otherwise  if  injurious  violation  of  duty  to  corporation,  91,  92. 
otherwise  if  fraud,  90,  92. 
MISREPRESENTATIONS  BY  PROMOTERS,    (See  SUBSCRIBERS 

FOR  SHARES.) 

a  question  of  substance,  not  of  mere  words,  151. 
liability  of  promoters  therefor  generally,  23. 
liability  of  promoter  to  shareholders  when   fiduciary  relation 

exists,  127-129. 

liability  of  promoter  in  damages  to  subscribers  for  shares  when 
no  fiduciary  relation,  131. 

must  be  an  assertion  of  fact,  not  opinion,  132-137. 
what  is  an  assertion  of  fact,  132. 
commendatory  expressions  privileged,  133. 
caveat  emptor,  130,  n.  1. 

statement  of  value  ordinarily  opinion  and  privileged,  133. 
treated  as  fact  when  made  as  by  expert  and  unprivileged, 

134. 
statements  of  price  paid  by  third  persons  for  shares,  fact, 

unprivileged,  135. 

statements  of  price  paid  by  corporation  for  property,  fact,  un- 
privileged, 135. 

expressions  of  hope  and  commendation  in  prospectus,  privi- 
leged, 135. 

ambiguous  statements,  when  unprivileged,  136. 
of  law,  purely,  privileged  (but  see  note  2),  138. 
of  mingled  law  and  fact,  not  privileged,  138. 
of  law  of  foreign  country,  fact,  unprivileged,  138. 
must  be  of  material  fact,  139. 

when  doubtful  as  to  whether  opinion  or  fact,  jury  to  de- 
termine, 139. 
must  be  fraudulent,  143. 
when  negligent,  not  ordinarily  actionable,  143. 

unless  a  duty  exists  to  be  careful,  143. 

must  be  made  knowingly,  without  belief  in  its  truth  or  reck- 
lessly, 143. 

motive  of  one  fraudulently  misrepresenting,  immaterial,  143. 
false  statements  made  as  upon  knowledge,  deemed  fraudu- 
lent, 144. 


INDEX.  293 

References  are  to  Sections. 

MISREPRESENTATIONS  BY   PROMOTERS  —  continued. 

forgetfulness  of  truth  no  excuse,  144. 
when  honestly  made,  though  without  reasonable  cause  for 

belief,  not  actionable.  145. 
absence  of  reasonable  cause  for  belief  evidence  of  fraud, 

145. 
when  honest,  discovery  of  truth  imposes  duty  to  correct, 

146. 

concealing  material  facts  implies  fraudulent,  147. 
prospectus,  undertaking  in,  not  to  tell  all  material  facts,  149. 
passive  concealment  or  non-disclosure  not  ordinarily  action- 
able, 150. 

statement  of  portion  of  truth  a  false  statement,  when,  151. 
omissions  in   prospectus   not  actionable  unless  they  make 

what  stated  false,  149. 

when  non-disclosure  of  particular  facts  made  fraudulent  mis- 
representations, 148. 

fraudulent  misrepresentation  ground  for  bill  in  equity,  150. 
false   inferences   made  plausible  by   partial  statements  of 

truth,  151. 

as  ground  for  action  by  purchasers  of  shares  against  promoter, 
ordinarily  none  from  statements  in  prospectus,  140. 
different  rule,  when,  141,  156. 

liability  of  corporation  for,  when  made  before  incorporation, 
ordinarily  none,  171. 

subscribers'  right  to  rescind  subscription  for  shares,  173. 
statements  in  prospectus  not  severable  from  application 

for  shares,  173. 

(See  also  SUBSCRIBERS  FOR  SHARES.) 
liability  of  co-promoters  for,  157. 
will  support  indictment  for  conspiracy  when,  156. 

MOTIVE, 

of  one  making  fraudulent  misrepresentations  immaterial,  143. 

NON-DISCLOSURE  BY  PROMOTERS, 

corporation's  liability  therefor  to  subscribers.     (See  SUBSCRIBERS 

FOR  SHARES.) 

non-liability  of  corporation  when  prior  to  organization,  173. 
but  prospectus  not  severable  from  application  for  shares,  173. 
non-disclosure  of   profits,  gifts,  or  commissions   as   ground  for 
action  by  corporation  for  accounting  or  damages,  42-48. 
for  rescission  by  corporation.     (See  RESCISSION.) 
for  action  by  subscriber  against  promoters  for  accounting  or 
damages,  123-129. 

under  English  Companies  Acts,  154. 

non-disclosure  of  material  facts  as  ground  for  action  of  deceit  by 
subscribers  against  promoters,  148-152. 


294  INDEX. 

References  are  to  Sections. 

NON-DISCLOSURE   BY  PROMOTERS  —  continued. 

suit  in  equity  by  subscribers  against  corporation,  150-152. 

(See  ACCOUNTABILITY,  ACTION,  COMMISSION,  CONCEAL- 
MENT, DISCLOSURE,  DUTIES  OP  PROMOTERS,  PROFIT, 
PROSPECTUS,  SUBSCRIBERS  FOR  SHARES.) 

OPINION, 

assertions  of,  by  promoters  ordinarily  not  actionable.  132,  137. 

OPTION  TO  BUY  PROPERTY,     (See  ACCOUNTABILITY.) 

acquisition  with  intent  to  sell  property  to  projected  corporation 

evidence  merely  of  promotership,  19. 
when  held  by  promoters,  whether  corporation  entitled  to  benefit 

of,  54,  56,  57. 
circumstances  under  which  corporation   entitled  to  benefit  of, 

55. 
when  held  by  person  confederating  with  promoters,  58,  59. 

PARTNERSHIP, 

co-promoters  not  prima  facie  partners,  233. 

promoters  and  shareholders  of  de  facto  corporation,  no  partner- 
ship liability,  253. 

of  association  supposed  to  be  corporation,  but  not  even  de 
facto  such,  as  to  partnership  liability,  265. 

PRIVILEGED  STATEMENTS.     (See  MISREPRESENTATIONS.) 

PROFIT,     (See  ACCOUNTABILITY.) 

what  is  distinguished  from  benefit,  60. 

circumstances  under  which  promoters  may  retain  profit,  32. 

promoter  not  to  make  secret  profit  on  sale  of  property  to  corpora- 
tion, 31,  32. 

must  be  accounted  for  by  promoter  when  property  has  market 
price,  61. 

but  not  if  sale  to  corporation  is  properly  approved  by  di- 
rectors, 61. 

as  to  accountability  for,  when  property  sold  has  not  market  price, 
62. 

net  profit  only  to  be  accounted  for,  79. 

remedies  when  corporation  makes  payment  in  its  stock,  83. 

interest,  82. 

burden  of  proof,  104. 

promoters,  although  majority  shareholders,  cannot  retain  secret 
profit,  117. 

PROJECTOR, 

not  necessarily  a  promoter,  17. 

PROMISE, 

to  be  a  director  may  make  one  a  promoter,  18. 


INDEX.  295 

References  are  to  Sections. 

PROMOTER, 

explanation  of  term,  1. 

term  not  applicable  to  one  acting  as  agent  only,  2,  3. 
one  who  is  an  agent  may  be  a  promoter  also,  5,  6. 
tests  to  ascertain  who  are  promoters,  7,  8,  9. 
question  of  fact  whether  one  is  a  promoter,  9-15. 
mere  intent  or  agreement  to  promote  does  not  make  one  a  pro- 
moter, 16. 
absolute  purchase  of  property  with  view  to  resale  to  projected 

corporation  as  evidence  of  promotership,  17,  18. 
conditional  purchase  of  property  with  view  to  resale  to  corpora- 
tion as  evidence  of  promotership,  19. 
promotership  not  limited  to  period  anterior  to  organization  of 

corporation,  20. 

fiduciary  relation  of  promoter  to  corporation,  21. 
existence  of  such  relation  established  by  authorities,  22. 
in  position  analogous  to  that  of  trustee,  32. 
duties  of  promoter  to  the  corporation,  24-37. 
promoters  may  or  may  not  be  in  fiduciary  relation  to  subscribers 

for  shares,  123,  130. 
promoters  not  prima  facie  partners,  233. 

not  prima  facie  each  other's  agents,  233. 
accountability  to  corporation  for  profit  obtained  as  vendors 
to  corporation,  42-62. 

for  gifts  and  commissions,  63-78. 
survival  of  cause  of  action  against,  89. 
liability  to  corporation  in  damages  for  breach  of  duty  or 

fraud,  90-92. 
breach  of  duty  or  fraud  by  entitling  corporation  to  rescind 

contract,  93-104. 
wrongs   by,   to  corporation,   shareholders'  bills  to  redress, 

105-122. 

liability  to  account  to  shareholders  for  profits,  gifts,  and  com- 
missions, 123-126. 

in  damages  when  in  fiduciary  position   toward  share- 
holders, 127-129. 

when  not  in  fiduciary  position  toward  shareholders, 

130-161. 
liability  to  subscribers  for  shares  when  corporation  proves 

abortive,  162-169. 

misrepresentation  by,  as  ground  for  action  for  damages  by 
subscribers  for  shares,  against  corporation,  170-172. 

as  ground  for  rescission  of  subscription  for  shares  or  as 

defence  to  suits  thereon  by  corporation,  173-193. 
contracts  made  by,  in  name  and  for  benefit  of  projected  cor- 
poration.    (See  CONTRACTS.) 

rights  and  liabilities  of,   under  such  contracts.     (See  CON- 
TRACTS.) 


296  INDEX. 

References  are  to  Sections. 

PROMOTER  —  continued. 

rights  and  liabilities  under  contracts  made  by  promoters 

claiming  to  be  incorporated.     (See  CONTRACTS.) 
contracts  between  promoters,  245-247. 

right  of  promoters  to  enforce  payment  from  corporation  for 
services  or  expenses  incident  to  its  formation,  218-224. 
(See  OTHER  TITLES.) 

PROMOTION  MONEY, 

explanation  of  term,  63. 

promoters  must  account  for,  64-74. 

in  hands  of  vendor  to  corporation  under  secret  agreement  with 

promoter  to  be  accounted  for,  75. 
devices  to  evade  rule  as  to,  will  be  set  aside,  49,  50,  73. 

PROSPECTUS, 

issuing  of,  by  promoter  does  not  create  fiduciary  relation  with  sub- 
scriber for  shares,  130. 

no  undertaking  in,  to  set  out  all  material  facts,  149. 
must  state  agreements  of  promoters  by  Statute  in  England,  154. 

otherwise  generally  in  United  States,  153. 

misrepresentations  in,  not  ordinarily  actionable  by  purchasers  of 
shares,  140. 

different  rule  when,  141,  156. 

ordinarily  promoter  not  liable  from  allowing  his  name  to  appear 
in,  if  he  does  not  act  in  undertaking,  235. 

but  may  be  liable  under  some  circumstances,  236. 

PURCHASE  BY  PROMOTER,     (See  ACCOUNTABILITY.) 

benefit  of,  may  belong  to  corporation,  28. 

when  made  by  promoter  acting  as  such,  42,  43. 

when  promoter  held  option  before  he  became  promoter,  54-57. 

when  made  without  sale  to  corporation  in  view,  44. 

when  made  by  promoter  before  he  became  such,  46-48. 

none  unless  promoter  is  bound  by  declarations  or  offers,  51- 

53,  55. 

what  offer  entitles  corporation  to  benefit  of,  55. 
made  with  intent  to  sell  to  corporation,  evidence  of  promotership, 
merely,  17,  18. 

PURCHASERS  OF  SHARES, 

rights  against  promoters  for  misrepresentations  in   prospectus, 
generally  none,  140. 

different  rule,  when,  141,  142. 

rights  against  promoters  for  misrepresentations  made  to  create 
fictitious  share  values,  142. 

RATIFICATION, 

by  corporation  is  irrevocable  if  intelligently  made,  100. 
election  to  ratify  may  be  express  or  implied,  100. 


INDEX.  297 

References  are  to  Sections. 
RATIFICATION  —  continued. 

distinguished  from  acceptance  or  adoption,  214. 
used  meaning  acceptance  or  adoption,  212,  213. 

RELATION, 

between  corporation  and  promoter  is  fiduciary,  21. 

consequences  of,  23. 

similar  to  that  of  trustee  and  cestui  que  trust,  21. 
between  promoter  and  shareholder  not  ordinarily  fiduciary,  130. 

but  may  be  fiduciary,  123-129. 

RELEASE, 

of  one  of  several  co-promoters  who  are  jointly  liable,  releases  all, 

241. 

REPRESENTATION.     (See  MISREPRESENTATION.) 
RESCISSION, 

by  corporation  of  contract  with  promoter, 
elective  remedy,  93. 

for  breach  of  duty  by  promoter  to  corporation,  94-97. 
right  barred  by  laches,  101. 
must  not  be  partial,  103. 

allowed  unless  promoter  has  disclosed  material  facts,  94-97. 
consideration  to  be  returned  unless  worthless,  102. 
equivalent  of  consideration  to  be  returned  in  what  cases,  102. 
return  of  value  of  consideration  in   money  ordinarily  in- 
sufficient, 103. 
burden  of  proof,  104. 
by  corporation  of  contracts  with  parties  other  than  promoters  for 

collusion,  99. 

by  minority  shareholders  when  majority  have  practised  fraud, 
110-112. 

when  majority  have  not  practised  fraud,  113,  114. 
in  absence  of  any  fraud,  115. 

of  subscription  for  shares  for  misrepresentations  or  non-disclosure 
of  promoters,  173-184. 

several  subscribers  may  join  as  plaintiffs,  174. 

what  proof  necessary,  187. 

laches  bar  suit,  188. 

waiver  may  be  shown,  189. 

burden  of  proof  to  show  laches  or  waiver  on  corporation,  190. 

without  suit,  193. 

effect  of  insolvency  of  corporation  on  suit  for,  191,  192. 

SALE  OF  PROPERTY  BY  PROMOTERS  TO  CORPORATION, 

if  promoters  have  interest,  must  disclose  it,  26. 

promoters  must  see  that  corporation  acts  through  competent  and 

disinterested  directors,  26. 
but  not  when  full  disclosure  made  to  shareholders,  27. 


298  INDEX. 

References  are  to  Sections. 

SALE    OF    PROPERTY    BY    PROMOTERS    TO    CORPORA- 
TION —  continued. 

when  necessary  to  disclose  anterior  price  paid  by  them,  28-30. 
mere  declaration  of  interest,  without  stating  nature  and  amount, 

not  enough  when  made  to  directors  only,  33,  34. 
but  such  declaration  sufficient  if  made  to  the  shareholders,  35. 
right  of  corporation  to  claim  benefit  of  promoter's  purchase.    (See 
BENEFIT.) 

to  recover  secret  profit  of  promoters.    (See  OPTION,  PROFIT.) 
to  rescind  purchase  on  ground  of  breach  of  duty  or  fraud  of 

promoters.     (See  RESCISSION.) 

right  of  shareholders  to  recover  to  their  own  use  secret  profits  of 
promoters,  123-125. 

SHARES   OF   STOCK, 

remedies  when  profit  or  commission  recoverable  from  promoter  is 

in  form  of  shares  of  corporation's  capital  stock,  83. 
SHAREHOLDERS, 

right  to  an  accounting  from  promoters,  123-125. 

joinder  of  plaintiffs,  126. 
action  for  damages  against  promoters  when  in  fiduciary  relation, 

127-129. 

when  relation  not  fiduciary.   (See  SUBSCRIBERS  FOR  SHARES.) 
action  against  promoter  to  recover  deposits  on  shares  when  cor- 
poration proves  abortive.     (See  ABORTIVE  CORPORATION.) 
remedies  against  corporation  when  led  to  become  shareholders  by 

misrepresentations    of    promoters,      (See    SUBSCRIBERS   FOR 

SHARES. 
enforcing  corporate  rights  and  redressing  corporate  wrongs   as 

against  promoters.     (See  SHAREHOLDERS'  BILL.  ) 
not  liable  for  corporate  debts,  if  corporation  is  a  de  facto  one,  253. 
rights  and  liabilities  when  shareholders  in  association  supposed  to 

be  a  corporation,  but  which  has  no  corporate  existence  even  de 

facto,  263-265. 
SHAREHOLDERS'   BILL, 

as  general  rule,  suit  can  be  brought  only  by  corporation,  105. 
exceptions  to  rule,  106. 

proof  necessary  to  establish  disability  of  corporation  to  sue,  107. 
transactions  on  account  of  which  shareholders  may  or  may  not 

bring  suit,  108. 
exposition  of  rule  on  subject  by  Lords  Justices  James  and  Mellish, 

109. 

right  of  minority  shareholders  to  sue  to  rescind  transaction  void- 
able for  fraud,  when  majority  are  the  wrong-doers,  110-112. 
right  of  minority,  where  majority  are  not  the  wrong-doers,  to  sue 

to  rescind  contracts  voidable  for  fraud,  113,  114 
right  of  minority  to  sue  to  rescind  a  voidable  transaction  where 

there  is  no  fraud,  115. 


INDEX.  299 

References  are  to  Sections. 

SHAREHOLDERS'  BILL  —  continued. 

right  of  miuority  to  sue  for  recovery  of  secret  profits  obtained  by 

promoters,  116. 

majority  not  allowed  to  retain  profits  wrongfully  obtained  at  ex- 
pense of  minority,  117. 
right  of  minority  to  sue  for  recovery  of  promoter's  profits  on  sale 

to  corporation  at  fraudulently  excessive  price,  118. 
shareholder  whose  shares  have  been  voted  on  in  favor  of  a  trans- 
action cannot  maintain  suit  based  upon  it,  119. 
rule  in  federal  courts,  120. 
shareholders'  suit  may  be  barred  by  laches,  121. 
form  of  shareholders'  suit.     Necessary  parties,  122. 
SUBSCRIBERS   FOR   SHARES,  (See  SHAREHOLDERS.) 
nature  of  contract  with  corporation,  211. 
estoppel  to  deny  legal  incorporation,  262. 

action  against  promoters  when  corporation  proves  abortive  to 
recover  payments  made  in  advance.  (See  ABORTIVE  CORPORA- 
TION.) 

not  ordinarily  in  fiduciary  relation  with  promoters,  130. 
action  against  promoters  for  an  accounting  or  damages,  when  in 

fiduciary  relation,  123-129. 

action  for  damages  against  promoters  for  misrepresentation  when  not 
in  fiduciary  relation, 

when  action  will  lie,  131. 

misrepresentation  must  be  assertion  of  fact,  132. 

mere  commendatory  expressions  privileged,  133. 

representations  as  to  value  in  exceptional  circumstances  not 

privileged,  134. 
representation  as  to  price  paid  by  third  persons  for  shares,  or 

as  to  cost  of  company's  property,  not  privileged,  135. 
commendatory  expressions  in  prospectuses,  136. 
expressions  of  opinion,  although  untrue,  not  actionable,  137. 
representations  as  to  the  law,  138. 
representation  must  be  of  a  material  fact,  139. 
promoters,  as  a  rule,  not  liable  to  purchasers  of  shares  for 
misrepresentations  in  prospectuses  addressed  by  them  to 
prospective  subscribers  for  shares,  140. 

but  connection  between  promoters  issuing   prospectus   and 
persons   purchasing  shares   in  reliance  upon   it   may   be 
shown,  141,  142. 
representation  must  be  fraudulent  as  well  as  false,  facts  to  be 

proved  to  establish  fraud,  143. 
false  representation  made  as  of  one's  own  knowledge  deemed 

fraudulent,  144. 
absence  of  reasonable  grounds  for  belief  in  representation 

evidence  that  it  is  fraudulent,  145. 

effect  of  subsequent  discovery  by  one  who  has  made  repre- 
sentation that  it  is  untrue,  146. 


300  INDEX. 

References  are  to  Sections. 

SUBSCRIBERS   FOR   SHARES  — continued. 

fraud  may  be  inferred  from  concealment  as  distinguished 
from  non-disclosure  of  material  facts,  147. 

circumstances  under  which  non-disclosure  of  facts  may  make 
facts  stated  false,  148. 

omission  of  facts  from  prospectus  not  ground  for  action  of 
deceit,  unless  it  makes  facts  stated  false,  149, 150. 

statement  of  portior  of  truth,  with  suggestions  and  infer- 
ences rendered  credible  only  by  suppression  of  other  por- 
tions of  truth,  151. 

rules  as  to  misrepresentation  and  non-disclosure  not  the  same 
in  actions  ex-deliclo  as  in  suits  for  equitable  relief,  152. 

no  legislation  in  this  country  requiring  promoters'  agreements 
to  be  disclosed  in  prospectuses,  153. 

English  statute  on  subject,  154. 

right  of  subscriber  to  rely  on  representations  addressed  to 
him,  155. 

liability  of  promoters  on  sale  of  shares  issued  to  them  at 
discount,  or  in  payment  for  property  at  over-valuation,  156. 

liability  of  promoters  for  misrepresentations  made  by  co- 
promoters,  157. 

conflicting  views  as  to  measure  of  damages,  158. 

rule  in  Massachusetts  and  other  jurisdictions,  159. 

rule  in  New  Jersey,  160. 

rule  laid  down  in  England  and  by  Supreme  Court  of  United 

States,  161. 

action  for  damages  against  corporation  for  promoter's  misrepresenta- 
tions or  non-disclosure, 

action  of  deceit  will  lie  against  a  corporation,  170. 

corporation  ordinarily  not  liable  in  damages  for  frauds  by 
promoters  prior  to  its  formation,  171. 

effect  of  insolvency  of  corporation  on  right  of  suit  by  sub- 
scriber to  recover  damages,  172. 
rescission  of  subscription,  or  defence  to  suits  thereon  by  corporation, 

responsibility  of  corporation  for  misrepresentation  or  non- 
disclosure by  promoters  before  corporation  formed,  173. 

subscribers'  remedies  against  corporation  for  fraudulent  mis- 
representation by  promoters,  174. 

remedy  when  misled  by  non-disclosure  of  facts  by  promoters, 
175. 

dicta  of  Vice->Chancellor  Kindersley,  176. 

dicta  of  Lord  Chelmsford,  177 

standard  of  duty  as  to  disclosure  required  by  dicta  quoted ; 
whether  legal  or  moral  duty,  178, 179. 

duty  to  disclose  material  facts  not  a  legal  duty  when  omission 
does  not  make  facts  stated  false,  180. 

absence  of  direct  decisions  on  this  point,  reasons  for  and 
against  requirement  of  disclosure,  181. 


INDEX.  301 

References  are  to  Sections. 
SUBSCRIBERS   FOR  SHARES  —  continued. 

contracts  to  take  shares  governed  by  maxim  caveat  emptor, 
182. 

views  of  Brett,  J.,  expressed  in  Gover's  Case,  183. 

relief  obtainable  in  equity,  and  in  some  jurisdictions  at  law, 
against  innocent  misrepresentation,  184. 

no  relief  at  law  where  distinction  in  procedure  between 
action  at  law  and  suit  in  equity  adhered  to,  185. 

principle  on  which  equity  rescinds  or  refuses  to  enforce  con- 
tract induced  by  innocent  misrepresentation,  186. 

proof  necessary  to  obtain  rescission  of  contract  of  subscrip- 
tion on  ground  of  innocent  misrepresentation,  187. 

laches  as  a  bar  to  rescission  of  contract  of  subscription,  188. 

waiver  of  right  to  avoid  subscription  on  ground  of  misrepre- 
sentation, 189. 

burden  of  proof  on  question  of  laches  or  waiver,  190. 

rule  in  England  as  to  effect  of  corporate  insolvency  on  right 
to  rescind  contract  of  subscription,  191. 

tendency  of  decisions  in  this  country,  192. 

repudiation  of  contract  of  subscription  without  suit  for 
rescission  effective,  although  corporate  insolvency  proceed- 
ings subsequently  begun,  193. 

SUBSCRIPTION  FOR  SHARES, 

nature  of  contract,  211. 

liability  of  corporation  for  expenses  of  procuring,  223. 

corporation  not  ordinarily  liable,  223. 

doctrine  of  the  "  burden  with  the  benefit  "  criticised,  224. 
(See  also  SUBSCRIBERS  FOR  SHARES.) 

SURVIVAL  of  action  by  corporation  against  promoter  for  an  account- 
ing, 89. 

SWELLING  PRICE.     (See  PROMOTION  MONEY.) 


TRUSTEE, 

rule  as  to  secret  profits  by,  31. 
analogy  of  promoter  to  trustee,  32. 

ULTRA    VIRES  ACTS, 

transactions  ultra  vires  the  corporation  not  validated  as  to  subse- 
quent shareholders  by  assent  of  all  the  shareholders  for  the 
time  being,  41. 

ground  for  shareholders'  bills,  108,  109. 

cannot  be  accepted  or  adopted  by  corporation,  217. 

expenses  ultra  vires  the  corporation,  promoters  not  allowed 
for,  80. 


302  INDEX. 

References  are  to  Sections. 

VENDOR  TO  CORPORATION, 

may  be  a  promoter  and  liable  as  such,  8. 

accountable  to  corporation  for  secret  promotion  money,  if  in  his 

hands,  75. 
agent  of,  may  be  a  promoter,  4,  5. 

WAIVER, 

burden  on  corporation  to  show  in  suit  by  subscriber  to  rescind 
subscription,  190. 


LAW  LIBRARY 

UNIVERSITY  OF  CALIFORNIA 

LOS  ANGELES 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


